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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON,
 D.C. 20549

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FORM 10-Q







|(Mark One)                                               |                                                                                         
|-------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                        | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|                                                         |                                                                                         
|For
        the quarterly period ended December 31, 2003
|or                                                      
|                                                         |                                                                                         
|o                                                        | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                         |                                                                                         
|For
        the transition period from 
        to      
|                                                        
|COMMISSION FILE NUMBER 0-13660                          
|                                                         |                                                                                         
|                                                        



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AAMES FINANCIAL CORPORATION (Exact Name of Registrant as Specified in its Charter)


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|                                                                                |  |                                              
|------------------------------------------------------------------------------- |  | ---------------------------------------------
|                                                                                |  |                                              
|DELAWARE                                                                        |  | 95-4340340                                   
|(State or Other Jurisdiction
        of 
        Incorporation or Organization) |  | (I.R.S. Employer 
        Identification No.)
|                                                                                |  |                                              
|350 SOUTH
        GRAND AVE, LOS ANGELES, CA 90071-3459                        
|(Address of principal executive offices)                                       
|                                                                                |  |                                              
|323-210-5000                                                                   
|(Issuer's
        telephone number)                                            
|                                                                               

Indicate
 by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer
 was required to file such reports), and (2) has been subject to such filing requirements for the past
 90 days.    Yesý  No   o

Indicate
  by check mark whether the registrant is an accelerated filer (as defined in
  Rule 12b-2 of the Exchange Act).    Yeso  No   ý

At February 10, 2004, Registrant had 7,156,775 shares of common stock outstanding.



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Table of Contents

|         | TABLE OF CONTENTS |            
|-------- | ----------------- | -----------
|Item No. |                   | Page Number

|                |  |                                                                                                                          |    | 
|--------------- |  | ------------------------------------------------------------------------------------------------------------------------ | -- | 
|                |  | PART
        I - FINANCIAL INFORMATION                                                                                   |    | 
|                |  |                                                                                                                          |    | 
|Item 1.         |  | Financial Statements                                                                                                     | 2  | 
|                |  |                                                                                                                          |    | 
|                |  | Condensed Consolidated Balance Sheets at December 31,
      2003 (Unaudited) and June 30, 2003 (Audited)                 | 2  | 
|                |  |                                                                                                                          |    | 
|                |  | Condensed Consolidated Income Statements for the three
      and six months ended December 31, 2003 and 2002 (Unaudited) | 3  | 
|                |  |                                                                                                                          |    | 
|                |  | Condensed Consolidated Statements of Cash Flows for
      the six months ended December 31, 2003 and 2002 (Unaudited)    | 4  | 
|                |  |                                                                                                                          |    | 
|                |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                         | 5  | 
|                |  |                                                                                                                          |    | 
|Item
      2.   |  | Management's Discussion and Analysis of Financial Condition
      and Results of Operations                              | 9  | 
|                |  |                                                                                                                          |    | 
|Item
      3.   |  | Quantitative and Qualitative Disclosures About Market
      Risk                                                         | 9  | 
|                |  |                                                                                                                          |    | 
|Item
      4.   |  | Controls and Procedures                                                                                                  | 41 | 
|                |  |                                                                                                                          |    | 
|                |  |                                                                                                                          |    | 
|                |  | PART
        II - OTHER INFORMATION                                                                                      |    | 
|                |  |                                                                                                                          |    | 
|Item
      1.   |  | Legal Proceedings                                                                                                        | 42 | 
|                |  |                                                                                                                          |    | 
|Item
      2.   |  | Changes in Securities and Use of Proceeds                                                                                | 42 | 
|                |  |                                                                                                                          |    | 
|Item
        3. |  | Defaults Upon Senior Securities                                                                                          | 42 | 
|                |  |                                                                                                                          |    | 
|Item
        4. |  | Submission of Matters to a Vote of Security Holders                                                                      | 42 | 
|                |  |                                                                                                                          |    | 
|Item
        5. |  | Other Information                                                                                                        | 43 | 
|                |  |                                                                                                                          |    | 
|Item
      6.   |  | Exhibits and Reports on Form 8 K                                                                                         | 43 | 
|                |  |                                                                                                                          |    | 
|                |  | Signature Page                                                                                                           | 45 | 
|                |  |                                                                                                                          |    | 



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Table of Contents

Item 1. Financial Statements

AAMES FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE
 SHEETS

|                                                                         | December 31, 2003(Unaudited) | June 30, 2003(Audited)
|------------------------------------------------------------------------ | ---------------------------- | ----------------------
|ASSETS                                                                   |                              |                       
|                                                                         |                              |                       
|Cash and cash equivalents                                                |                              | $   11,611,000        
|Loans held for sale, at lower of cost or market                          |                              | 690,868,000           
|Advances and other receivables                                           |                              | 21,183,000            
|Residual interests, at estimated fair value                              |                              | 51,979,000            
|Deferred income taxes                                                    |                              | 16,206,000            
|Equipment and improvements, net                                          |                              | 9,063,000             
|Prepaid and other                                                        |                              | 15,274,000            
|                                                                         |                              |                       
|Total assets                                                             |                              | $ 816,184,000         
|                                                                         |                              |                       
|LIABILITIES AND STOCKHOLDERS' EQUITY                                     |                             
|                                                                         |                              |                       
|Borrowings                                                               |                              | $   87,217,000        
|Revolving warehouse and repurchase facilities                            |                              | 603,051,000           
|Accounts payable and accrued expenses                                    |                              | 34,553,000            
|Accrued dividends on convertible preferred stock                         |                              | --                    
|Income taxes payable                                                     |                              | --                    
|                                                                         |                              |                       
|Total liabilities                                                        |                              | 724,821,000           
|                                                                         |                              |                       
|Commitments and contingencies                                            |                             
|Stockholders' equity:                                                    |                             
|Series A Preferred Stock, par value $0.001 per share; 500,000 shares     |                              |                       
|authorized; none outstanding                                             |                              | --                    
|Series B Convertible Preferred Stock, par value $0.001 per share;        |                              |                       
|29,704,000 shares authorized; 26,704,000 shares outstanding              |                              | 27,000                
|Series C Convertible Preferred Stock, par value $0.001 per share;        |                              |                       
|34,500,000 and 61,230,000 shares authorized; 19,800,000 shares and       |                              |                       
|20,175,000 shares outstanding                                            |                              | 20,000                
|Series D Convertible Preferred Stock; par value $0.001 per share;        |                              |                       
|108,566,000 shares authorized; 59,920,000 shares and 59,923,000 shares   |                              |                       
|outstanding                                                              |                              | 60,000                
|Series E Preferred Stock; par value $0.001 per share; 26,700,000 shares  |                              |                       
|authorized; none outstanding                                             |                              | --                    
|Common Stock, par value $0.001 per share; 400,000,000 shares authorized; |                              |                       
|7,057,000 shares and 6,699,000 shares outstanding                        |                              | 7,000                 
|Additional paid-in capital                                               |                              | 417,980,000           
|Retained deficit                                                         |                              | (326,731,000          
|                                                                         |                              |                       
|Total stockholders' equity                                               |                              | 91,363,000            
|                                                                         |                              |                       
|Total liabilities and stockholders' equity                               |                              | $ 816,184,000         
|                                                                         |                              |                       

See accompanying notes to condensed consolidated financial
 statements.


2

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AAMES FINANCIAL CORPORATION
 AND SUBSIDIARIES CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)



|                                     | Three Months EndedDecember 31, | Six Months EndedDecember 31,
|------------------------------------ | ------------------------------ | ----------------------------
|                                     |                                | 2003                        
|Revenue:                             |                               
|Gain on sale of loans                |                                | $  50,624,000               
|Write-down of residual interests     |                                | --                          
|Origination fees                     |                                | 15,996,000                  
|Loan servicing                       |                                | 2,177,000                   
|Debt extinguishment income           |                                | --                          
|Interest                             |                                | 17,317,000                  
|                                     |                                |                             
|Total revenue, including             |                                |                             
|write-downs of residual              |                                |                             
|interests                            |                                | 86,114,000                  
|                                     |                                |                             
|Expenses:                            |                               
|Personnel                            |                                | 42,864,000                  
|Production                           |                                | 8,347,000                   
|General and administrative           |                                | 12,322,000                  
|Interest                             |                                | 5,184,000                   
|                                     |                                |                             
|Total expenses                       |                                | 68,717,000                  
|                                     |                                |                             
|Income before income taxes           |                                | 17,397,000                  
|Provision (benefit) for income taxes |                                | 217,000                     
|                                     |                                |                             
|Net income                           |                                | $  17,180,000               
|                                     |                                |                             
|Net income to common stockholders:   |                               
|Basic                                |                                | $  13,342,000               
|                                     |                                |                             
|Diluted                              |                                | $  17,702,000               
|                                     |                                |                             
|Net income per common share:         |                               
|Basic                                |                                | $             1.90          
|                                     |                                |                             
|Diluted                              |                                | $             0.17          
|                                     |                                |                             
|Weighted average number of common    |                               
|shares outstanding:                  |                               
|Basic                                |                                | 7,030,000                   
|                                     |                                |                             
|Diluted                              |                                | 104,642,000                 
|                                     |                                |                             
|                                     |                               

See accompanying notes to condensed consolidated
 financial statements

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AAMES FINANCIAL CORPORATION
 AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

|                                                                              | Six Months EndedDecember 31,
|----------------------------------------------------------------------------- | ----------------------------
|                                                                              |                             
|Operating activities:                                                         |                             
|Net income                                                                    |                             
|Adjustments to reconcile net income to net cash used in operating activities: |                             
|Depreciation and amortization                                                 |                             
|Write-down of residual interests                                              |                             
|Accretion of residual interests                                               |                             
|Deferred income taxes                                                         |                             
|Debt extinguishment income                                                    |                             
|Changes in assets and liabilities:                                            |                             
|Loans held for sale originated                                                |                             
|Proceeds from sale of loans held for sale                                     |                             
|Decrease in:                                                                  |                             
|Advances and other receivables                                                |                             
|Residual interests                                                            |                             
|Prepaid and other                                                             |                             
|Increase (decrease) in:                                                       |                             
|Accounts payable and accrued expenses                                         |                             
|Income taxes payable                                                          |                             
|                                                                              |                             
|Net cash used in operating activities                                         |                             
|                                                                              |                             
|Investing activities:                                                         |                             
|Purchases of equipment and improvements                                       |                             
|                                                                              |                             
|Net cash used in investing activities                                         |                             
|                                                                              |                             
|Financing activities:                                                         |                             
|Reduction in borrowings                                                       |                             
|Net proceeds from revolving warehouse and repurchase facilities               |                             
|Payment of preferred stock dividends                                          |                             
|Proceeds from exercise of common stock options                                |                             
|Net cash provided by financing activities                                     |                             
|                                                                              |                             
|Net decrease in cash and cash equivalents                                     |                             
|Cash and cash equivalents at beginning of period                              |                             
|                                                                              |                             
|Cash and cash equivalents at end of period                                    |                             
|                                                                              |                             

See accompanying notes to condensed consolidated financial
 statements.

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# AAMES FINANCIAL CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)

Note 1: Basis of Presentation

The
 condensed consolidated financial statements of Aames Financial Corporation, a Delaware corporation (the
 Parent), and its subsidiaries (collectively, with the Parent, the Company) included herein have
 been prepared by the Company, without audit, pursuant to the rules and regulations of the United States
 Securities and Exchange Commission. Certain information and footnote disclosures normally included in
 financial statements prepared in accordance with accounting principles generally accepted in the United
 States have been omitted.

The
 condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries
 after eliminating all significant intercompany transactions and reflect all normal, recurring adjustments
 which are, in the opinion of management, necessary to present a fair statement of the results of operations
 of the Company in conformity with accounting principles generally accepted in the United States for
 the interim periods reported. The results of operations for the Company for the three and six months
 ended December 31, 2003 are not necessarily indicative of the results expected for the full fiscal year.

At
 December 31, 2003, Specialty Finance Partners (SFP), a partnership controlled by Capital Z Financial
 Services Fund, II, L.P., a Bermuda partnership (together with SFP, Capital Z) owned preferred
 stock representing approximately 43.1% of the Companys combined voting power in the election of directors
 and approximately 90.1% of the combined voting power in all matters other than the election of directors.
 Representatives or nominees of Capital Z have five of the nine seats on the Board of Directors, and
 as current members terms expire, Capital Z has the continuing right to appoint and elect four directors
 and nominate one additional director. As a result of its beneficial ownership and Board representation,
 Capital Z has, and will continue to have, sufficient power to determine the Companys direction and
 policies.

Note 2: Guaranty Arrangements

The
 Parent has guaranteed amounts outstanding under certain revolving warehouse and repurchase agreements
 pursuant to which certain of its wholly-owned operating subsidiaries are the contractual borrowers.
 The Parent has also guaranteed amounts outstanding under a borrowing facility, secured by one of the
 operating subsidiarys residual interests and certain of that subsidiarys advance receivables (the
 Financing Facility), pursuant to which that subsidiary is the contractual borrower. The Parents guarantees
 are full, complete and unconditional. On November 17, 2003, the Company made a $33.0 million principal
 reduction on the Financing Facility and Capital Z was released from its role as a limited guarantor
 on the Financing Facility.

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Note 3: Per Share Data

The
 following table sets forth information regarding basic and diluted net income per common share for the
 three and six months ended December 31, 2003 and 2002 (amounts in thousands, except per share data):

|                                          | Three Months EndedDecembe 31, | Six Months EndedDecember 31,
|----------------------------------------- | ----------------------------- | ----------------------------
|                                          |                               | 2003                        
|Basic net income per common share:        |                              
|Net income                                |                               | $ 17,180                    
|Less: Accrued dividends on Series B, C    |                               |                             
|and D Convertible Preferred Stock         |                               | (3,838                      
|                                          |                               |                             
|Basic net income to common stockholders   |                               | $ 13,342                    
|                                          |                               |                             
|Basic weighted average number of common   |                               |                             
|shares outstanding                        |                               | 7,030                       
|                                          |                               |                             
|Basic net income per common share         |                               | $ 1.90                      
|                                          |                               |                             
|Diluted net income per common share:      |                               |                             
|Basic net income to common                |                               |                             
|stockholders                              |                               | $ 13,342                    
|Plus: Accrued dividends on Series B,      |                               |                             
|C and D Preferred Stock                   |                               | 3,838                       
|Interest on 5.5% Convertible              |                               |                             
|Subordinated Debentures                   |                               | 522                         
|                                          |                               |                             
|Diluted net income to common stockholders |                               | $ 17,702                    
|                                          |                               |                             
|Basic weighted average number of          |                               |                             
|common shares outstanding                 |                               | 7,030                       
|Plus incremental shares from assumed:     |                               |                             
|Conversions of:                           |                               |                             
|Series B, C and D Convertible             |                               |                             
|Preferred Stock                           |                               | 85,136                      
|5.5% Convertible Subordinated             |                               |                             
|Debentures                                |                               | 824                         
|Exercise of:                              |                               |                             
|Common stock options                      |                               | 8,137                       
|Warrants                                  |                               | 3,515                       
|                                          |                               |                             
|Diluted weighted average number of common |                               |                             
|shares outstanding                        |                               | 104,642                     
|                                          |                               |                             
|Diluted net income per common share       |                               | $ 0.17                      
|                                          |                               |                             

Note 4: Pro forma Stock Based Compensation

The
 Company applies Accounting Principles Board Opinion 25 and related interpretations in accounting for
 its stock-based compensation plans and arrangements. No compensation cost has been recognized for its
 stock option plan. If compensation cost for the stock option plan and arrangements had been determined
 based on the fair value at the grant dates for awards under this plan consistent with the method prescribed
 by Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation
  Transition and Disclosure, an amendment of SFAS No. 123", the Companys net income and basic and diluted
 income per common share during the three and six months ended December 31, 2003 and 2002 would have
 reflected the pro forma amounts indicated below (amounts in thousands, except per share data):

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|                                                  | Three Months EndedDecember 31, | Six Months EndedDecember 31,
|------------------------------------------------- | ------------------------------ | ----------------------------
|                                                  |                                | 2003                        
|Net income:                                       |                               
|As reported                                       |                                | $17,180                     
|Pro forma                                         |                                | 16,855                      
|Basic net income (loss) to common stockholders:   |                               
|As reported                                       |                                | 13,342                      
|Pro forma                                         |                                | 13,017                      
|Diluted net income (loss) to common stockholders: |                               
|As reported                                       |                                | 17,702                      
|Pro forma                                         |                                | 17,377                      
|Basic net income (loss) per common share:         |                               
|As reported                                       |                                | 1.90                        
|Pro forma                                         |                                | 1.85                        
|Diluted net income (loss) per common share:       |                               
|As reported                                       |                                | 0.17                        
|Pro forma                                         |                                | 0.17                        

The
 fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing
 model with the following weighted-average assumptions:

|                        | Three Months EndedDecember 31 | Six Months EndedDecember 31,
|----------------------- | ----------------------------- | ----------------------------
|                        |                               | 2003                        
|                        |                               |                             
|Dividend yield          |                               | 0                           
|Expected volatility     |                               | 103                         
|Risk-free interest rate |                               | 3                           
|Expected life of option |                               | 4.5 y                       

The pro forma stock based compensation cost,
 net of tax effect was $0.3 million and $0.4 million during the three months ended December 31, 2003
 and December 31, 2002, respectively, and was $0.6 million and $0.7 million during the six months ended
 December 31, 2003 and 2002, respectively.

Note 5: Income Taxes

Deferred
 income tax assets and liabilities are recognized to reflect the future tax consequences of net operating
 loss carry forwards and differences between the tax basis and financial reporting basis of assets and
 liabilities. The investment in the Company by Capital Z resulted in a change of control for income tax
 purposes, thereby potentially limiting the Companys ability to utilize net operating loss carry forwards
 and certain other future deductions.

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The
 Company has recognized that it is more likely than not that certain future tax benefits, primarily net
 operating loss carry forwards, will be realized as a result of future income. Accordingly, during the
 three and six months ended December 31, 2003, the Company decreased its deferred tax valuation allowance
 to recognize higher than previously anticipated net deferred tax assets. During the three months ended
 December 31, 2003, the Company decreased its deferred tax valuation allowance by $1.7 million to recognize
 higher than previously anticipated net deferred tax assets for federal purposes and provided $1.9 million
 for state taxes. During the six months ended December 31, 2003, the Company decreased its deferred tax
 valuation allowance by approximately $19.3 million to recognize deferred tax assets. During the three
 and six months ended December 31, 2002, the Company provided $1.6 million and $2.2 million, respectively,
 for taxes, substantially all of which related to tax on excess inclusion income on the securitization
 trusts.

Note 6: Borrowings and Debt Extinguishment
 Income

On
 December 13, 2002, the Company consummated its offer to exchange (the Exchange Offer) its newly issued
 5.5% Convertible Subordinated Debentures due 2012 (the New Debentures) for its outstanding 5.5% Convertible
 Subordinated Debentures due 2006 (the Existing Debentures). The Company exchanged $49.6 million of
 the outstanding Existing Debentures that were tendered and issued an equal amount of New Debentures.
 On December 23, 2002, the Company redeemed $19.8 million, or 40.0%, of the principal amount outstanding
 on the New Debentures through a scheduled mandatory sinking fund payment. On December 31, 2002, SFP
 forgave $25.0 million principal balance of its New Debentures due it from the Company. At December 31,
 2003, amounts outstanding under the Existing Debentures were $64.4 million. The $4.8 million of New
 Debentures were fully redeemed on June 30, 2003.

During
 the three months ended December 31, 2002, the Company recorded $26.0 million of debt extinguishment
 income which was comprised of $25.0 million related to SFPs forgiveness of its holdings of the Companys
 New Debentures and $1.0 million related to the Companys extinguishment of $11.5 million of its 9.125%
 Senior Notes due November 2003 (the Senior Notes) at a discount from par for $10.5 million of cash.
 The Senior Notes were fully redeemed on June 30, 2003. During the six months ended December 31,
 2002, the Company recorded $27.1 million of debt extinguishment income comprised of the $25.0 million
 discussed immediately above plus $1.1 million related to the Companys purchase of $7.5 million face
 amount of its Senior Notes for $6.4 million of cash during the three months ended September 30,
 2002.

Note 7. Stockholders Equity

During
 the three months ended December 31, 2003, the Company cancelled 30,000 shares of Series C Convertible
 Preferred Stock. On December 23, 2003 and December 31, 2003, the Company paid $55.7 million and $2.9
 million, respectively, or an aggregate of $58.6 million, of dividends on its Series B, Series C and
 Series D Convertible Preferred Stock. On September 16, 2003, the Company amended and restated its certificate
 of incorporation permitting the Company to issue up to 26.7 million shares of Series E Preferred Stock,
 par value $0.001 per share, and reduced the number of authorized shares of Series C Convertible Preferred
 Stock accordingly.

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Note 8: Reclassifications

Certain
 amounts in the fiscal 2003 financial statements have been reclassified to conform to the fiscal 2004
 presentation.

Item     2.
 Managements Discussion and Analysis of Financial Condition and Results of Operations. The following
 discussion and analysis of the financial condition and results of operations of Aames Financial Corporation
 (the Company) should be read in conjunction with the Companys Condensed Consolidated Financial Statements
 included in Item 1 of this Form 10-Q.

Item 3.     
 Quantitative and Qualitative Disclosures About Market Risk. The following discussion includes Management's
 Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative
 Disclosures about Market Risk.

Special Note Regarding
 Forward-Looking Information

From
 time to time the Company may publish forward-looking statements relating to such matters as anticipated
 financial performance, business prospects and similar matters. The Private Securities Litigation Reform
 Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms
 of the safe harbor, the Company notes that a variety of factors could cause the Companys actual results
 and experience to differ materially from the anticipated results or other expectations expressed in
 the Companys forward-looking statements. The risks and uncertainties that may affect the operations,
 performance and results of the Companys business include the following: increases in mortgage lending
 interest rates; adverse changes in the secondary market for mortgage loans; decline in real estate values;
 limited cash flow to fund operations; dependence on short-term financing facilities; concentration of
 operations in California, Florida and Texas; extensive government regulation; intense competition in
 the mortgage lending industry and the condition of the U.S. economy and financial system. For a more
 complete discussion of these risks and uncertainties, see Item 7. Managements Discussion and Analysis
 of Financial Condition and Results of Operations  Risk Factors in the Companys Annual Report on Form
 10-K for the year ended June 30, 2003 and subsequent filings by the Company with the United States Securities
 and Exchange Commission.

General

The
 Company is a consumer finance company primarily engaged, through its subsidiaries, in the business of
 originating, selling and servicing mortgage loans collateralized by single family residences. Upon its
 formation in 1991, the Company acquired Aames Home Loan, a home equity lender making loans in California
 since it was founded in 1954. In 1995, the Company expanded its retail presence outside of California
 and began purchasing loans from correspondents. In August 1996, the Company acquired its broker
 production channel through the acquisition of One Stop Mortgage, Inc. In 1999, the Company consolidated
 its loan production channels into one company, and the retail and broker production channels now operate
 under the name Aames Home Loan.

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The
 Companys principal market is borrowers whose financing needs are not being met by traditional mortgage
 lenders for a variety of reasons, including the need for specialized loan products or credit histories
 that may limit such borrowers access to credit. The Company believes these borrowers continue to represent
 an underserved niche of the home equity loan market and present an opportunity to earn a superior return
 for the risk assumed. The residential mortgage loans originated by the Company, which include fixed
 and adjustable rate loans, are generally used by borrowers to consolidate indebtedness, to finance other
 consumer needs, to purchase homes and, to a lesser extent, to refinance existing mortgage indebtedness.

The
 Company originates loans through its retail and broker production channels. The Companys retail channel
 produces loans through its retail branch network and through the National Loan Centers, which produce
 loans primarily through affiliations with sites on the Internet. The Companys broker channel produces
 loans through account executives working throughout the United States, including purchasing a limited
 amount of closed loans from mortgage brokers on a continuous or flow basis, and by sourcing loans
 through telemarketing and the Internet.

The
 Company continues to focus on increasing its profitability through executing its core business strategy
 of: (i) increasing the amount and value of its loan production; (ii) reducing its unit cost
 of production; and (iii) maintaining adequate liquidity and access to the capital markets.

Increasing the Amount and Value of Its Loan
 Production. The Company intends to increase the size of its overall originations while improving
 its value. The Companys retail branch network, the National Loan Centers and its regional broker operations
 centers, and its broker telemarketing and Internet platforms, are all targeted as sources of growth.
 In its retail branch network, the Company intends to drive this growth by: improving market penetration
 in its existing markets, introducing new products, and improving its customer service levels and branch
 efficiencies. The Companys regional broker operations centers plan to grow by: improving the service
 levels it offers to its current group of independent mortgage brokers, continuing to build new relationships
 with independent mortgage brokers throughout the country and introducing new products that meet the
 needs of brokers customer bases. The Companys National Loan Centers, which produce loans through affiliations
 with sites on the Internet, and its growing broker telemarketing and Internet channel are planning to
 increase their scale by: identifying additional non-traditional lead sources, increasing their product
 offerings and expanding their overall operations. Additionally, the Company plans to continue using
 its knowledge of current customer needs and the historical performance of its loans to improve the value
 of its offerings to its retail customers and independent mortgage brokers while maximizing the resale
 value of its production.

Reducing Its Unit Cost of Production.
 The Company intends to reduce its unit cost of production by leveraging its investment in its origination
 technology platform, increasing the amount of automation in the loan origination process and increasing
 the scale of the origination business driving fixed costs down as a percentage of overall production
 costs. The Company will also continue its on-going effort of identifying opportunities for cost reductions
 across all levels of the Companys operations.

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The
 recent volatility in mortgage rates and the resulting less favorable mortgage interest rate environment
 has reduced the overall demand for mortgage loans generally. While the Company has not to date experienced
 a reduced demand for its mortgage loan products specifically, and while no assurances can be made, should
 that event occur the Company expects to be responsive to such changes in market conditions by reducing
 its loan origination costs in light of reduced loan origination levels.

Maintaining Adequate Liquidity and Access
 to the Capital Markets. The Company intends to continue to increase and diversify its funding sources
 by expanding its current funding relationships and identifying new funding sources. The Company intends
 to continue to fund its operations by disposing of a majority of its loan production for cash in the
 whole loan market, monetizing the overcollateralization on the Companys portfolio of mortgage loans
 in securitization trusts, monetizing residual interests, mortgage servicing rights and the rights to
 prepayment fees on the mortgage loans in its new securitizations, if any, monetizing servicing advances
 and developing new sources for working capital.

The
 strategies discussed above contain forward-looking statements. Such statements are based on current
 expectations and are subject to risks, uncertainties and assumptions, including those discussed under
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsRisk
 Factors included in the Companys Annual Report on Form 10-K for the year ended June 30,
 2003. Should one or more of these risks or uncertainties materialize, or should underlying assumptions
 prove incorrect, actual results may vary materially from those anticipated, estimated or projected.
 Thus, no assurance can be given that the Company will be able to accomplish the above strategies.

Recent Events

During
 the three months ended December 31, 2003, the Company recorded net income of $17.2 million compared
 to $2.1 million of net income during the comparable three month period a year ago.

Total
 revenue during the three months ended December 31, 2003 increased $22.1 million to $86.1 million from
 $64.0 million during the comparable three month period a year ago. During the three months ended December
 31, 2003, the Company did not record any debt extinguishment income and did not write down its residual
 interests. Total revenue during the three months ended December 31, 2002 includes $26.0 million of debt
 extinguishment income. Total revenue during the three months ended December 31, 2002 also includes
 a $31.9 million write-down to the Companys residual interests. Excluding the $26.0 million of debt
 extinguishment income and the $31.9 million write-down to the residual interests during the three months
 ended December 31, 2002, operating revenue increased $16.2 million during the three months ended December
 31, 2003 from operating revenue during the comparable three month period in 2002. The $16.2 million
 increase in operating revenue was comprised of increases of $18.1 million and $1.7 million, respectively,
 in gain on sale of loans and in origination fees, respectively, partially offset by decreases of $3.4
 million and $0.2 million in interest income and loan servicing income, respectively.

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Total
 expenses during the three months ended December 31, 2003 increased $8.4 million to $68.7 million from
 $60.3 million during the three months ended December 31, 2002. The increase in expenses during the three
 months ended December 31, 2003 from expenses reported during the comparable three month period a year
 ago was attributable primarily to increases of $7.2 million, $1.4 million and $2.7 million in personnel,
 general and administrative and production expenses, respectively, partially offset by a $2.9 million
 decrease in interest expense.

As
 previously reported, on December 23, 2003 and December 31, 2003, the Company made dividend payments
 of $55.7 million and $2.9 million, respectively, on its Series B Convertible Preferred Stock, Series
 C Convertible Preferred Stock, and Series D Convertible Preferred Stock (collectively, the Preferred
 Stock). The Company had previously obtained waivers from certain lenders permitting the Company to
 pay the dividend on its Preferred Stock.

As
 previously reported, on November 12, 2003, the Company called six securitization trusts (the November
 Trust Call) with an unpaid principal balance of $274.8 million of mortgage loans. As master servicer
 of the mortgage loans in the securitization trusts, the Company had the right to call the securitization
 trusts when the remaining balance of the mortgage loans sold in the securitization trusts is less than
 or equal to 10.0% of the original mortgage loan balance. The principal benefit of calling securitization
 trusts was to improve the Companys liquidity position. When the Company called the securitization trusts,
 the Company received a majority of the overcollateralization balance in a combination of mortgage loans
 in the securitization trusts and in cash. The Company sold the $274.8 million of mortgage loans from
 the six securitization trusts. As a result of the November Trust Call, the Company received proceeds
 of approximately $78.2 million and repaid the financing facility secured by its residual interests and
 certain of its servicing advances (the Financing Facility) by approximately $34.5 million. Upon paydown
 of the Financing Facility, the limited guaranty on the Financing Facility by Capital Z Financial Services
 Fund II, L.P., a Bermuda partnership (Capital Z), an affiliate of Specialty Finance Partners, the
 Companys largest stockholder (SFP) was extinguished. The Company used a portion of the remaining
 proceeds from the November Trust Call to pay the preferred stock dividend.

On
 December 1, 2003, the Company renewed a $200.0 million revolving warehouse and repurchase facility with
 a new maturity of December 1, 2004, maintaining the total capacity under its total revolving warehouse
 and repurchase facilities at $1.2 billion of which $1.1 billion was committed and $100.0 million was
 uncommitted, unchanged from September 30, 2003.

Mortgage Loan Production. The Company
 originates mortgage loans through its retail and broker production channels. The Companys retail channel
 produces loans through its retail branch network and through the National Loan Centers, which produce
 loans primarily through affiliations with sites on the Internet. The Companys broker channel produces
 loans through account executives working throughout the United States, including purchasing a limited
 amount of closed loans from mortgage brokers on a continuous or flow basis, and by sourcing loans
 through telemarketing and the Internet. The Company generally underwrites the loans it originates to
 its underwriting guidelines and, to a lesser extent, to the underwriting guidelines of its investors
 in the secondary markets, and appraises the collateral on every loan it originates. The underwriting
 of a mortgage loan to be originated by the Company generally includes a review of the completed loan
 package, including the loan application, a current appraisal, a preliminary title report and a credit
 report.

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The
 following table presents the volume of loans originated by the Company during the periods presented
 (in thousands):

|                           | Three Months Ended | Six Months Ended
|-------------------------- | ------------------ | ----------------
|
|
|                           |                    | 2003            
|Retail:                    |                   
|Retail branch network      |                    | $   521,678     
|National Loan Centers      |                    | 70,183          
|                           |                    |                 
|Total retail               |                    | 591,861         
|                           |                    |                 
|Broker:                    |                   
|Regional broker operations |                    |                 
|centers (1)                |                    | 875,755         
|Telemarketing and Internet |                    | 191,872         
|                           |                    |                 
|Total broker               |                    | 1,067,627       
|                           |                    |                 
|Total production           |                    | $1,659,488      
|                           |                    |                 



|(1) |  | Includes the purchase of closed loans on a flow
 basis from correspondents of $0.2 million, $0.9 million and $3.9 million during the three months ended
 December 31, 2003, 2002 and September 30, 2003, respectively, and $4.1 million and $4.2 million during
 the six months ended December 31, 2003 and 2002, respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Total Loan Production. Total loan production
 during the three months ended December 31, 2003 increased $162.1 million, or 10.8%, to $1.7 billion
 over the $1.5 billion reported during the three months ended September 30, 2003, and increased $352.8
 million, or 27.0%, over the $1.3 million of total loan production reported during the three months ended
 December 31, 2002. Total loan production during the six months ended December 31, 2003 increased $881.0
 million, or 38.7%, to $3.2 billion over the $2.3 billion of total loan production during the six months
 ended December 31, 2002. Total loan production during the three and six months ended December 31, 2003
 increased due to the combination of the Company's adoption of new mortgage loan product guidelines,
 continued strong demand for subprime products in the generally favorable mortgage interest rate environment
 prevailing  in the marketplace, and improved geographic diversification in the broker channel.

Retail Production. The Companys total
 retail production was $591.9 million during the three months ended December 31, 2003, an increase of
 $15.1 million, or 2.6%, over the $576.8 million reported during the three months ended September 30,
 2003, and an increase of $75.6 million, or 14.7%, over the $516.2 million of total retail production
 during the three months ended December 31, 2002. During the six months ended December 31, 2003, total
 retail production was $1.2 billion, an increase of $200.2 million, or 20.7%, over the $968.4 million
 of total retail production during the six months ended December 31, 2002.

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Retail
 Branch Network

The
 Companys retail branch network production was $521.7 million during the three months ended December
 31, 2003, an increase of $64.0 million, or 14.0%, over the $457.7 million of retail branch network production
 reported during the three months ended September 30, 2003, and an increase of $149.1 million, or 40.0%,
 over the $372.5 million reported during the three months ended December 31, 2002. During the six months
 ended December 31, 2003, retail branch network production was $979.4 million, an increase of $284.9
 million, or 41.0%, over the $694.5 million of mortgage loan production during the comparable six month
 period a year ago.

National
 Loan Centers

Mortgage
 loan production from the Company's National Loan Centers, which primarily originate loans through affiliations
 with certain Internet sites, decreased $48.9 million, or 41.1% to $70.2 million during the three months
 ended December 31, 2003 from $119.1 million during the three months ended September 30, 2003, and decreased
 $73.5 million, or 51.2%, from the $143.7 million of loan production reported during the three months
 ended December 31, 2002. During the six months ended December 31, 2003, the National Loan Centers' production
 was $189.3 million, a decrease of $84.7 million, or 30.9%, from the $274.0 million of production during
 the comparable six month period a year ago. The decrease in the National Loan Centers' production during
 the three and six months ended December 31, 2003 compared to their production during the three and six
 months ended December 31, 2002 was due to a decline in the effectiveness of marketing leads from Internet
 sites, together with changes in processing and underwriting in the National Loan Centers implemented
 during the past year designed to improve productivity and value in the channel over the long term, but
 which were disruptive to loan production during implementation. The Company is changing the marketing
 lead strategy of the National Loan Centers to better utilize leads from other areas and decrease the
 reliance on marketing leads from the Internet in order to increase production in the National Loan Centers.

Broker
 Production. The Companys total broker production increased $147.0 million, or 16.0%, to $1.1 billion
 during the three months ended December 31, 2003 over the $920.6 million of total broker production reported
 during the three months ended September 30, 2003, and increased $277.1 million, or 35.1%, over the $790.5
 million reported during the three months ended December 31, 2002. During the six months ended December
 31, 2003, total broker mortgage loan production increased $680.8 million, or 52.1%, to $2.0 billion
 over the $1.3 billion of total broker production during six months ended December 31, 2002.

Regional
 Broker Operations Centers

Mortgage
 loan production from the regional broker operations centers during the three months ended December 31,
 2003 was $875.8 million, an increase of $124.1 million and $172.8 million, or 16.5% and 24.6%, respectively,
 over the $751.7 million and $702.9 million, respectively, of such production during the three months
 ended September 30, 2003 and December 31, 2002, respectively. During the six months ended December 31,
 2003, mortgage loan production through the Companys regional broker operations centers was $1.6 billion,
 an increase of $459.3 million, or 39.3%, over the $1.2 billion of such production during the six months
 ended December 31, 2002. In November 2003, the Company added a regional broker operations center in
 the northeastern United States, which enabled the Company to increase its production in that region.

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Broker
 Telemarketing and Internet

Broker
 mortgage loan production through telemarketing and the Internet was $191.9 million during the three
 months ended December 31, 2003, an increase of $23.0 million, or 13.6%, over the $168.9 million reported
 during the three months ended September 30, 2003, and an increase of $102.3 million over the $89.6 million
 reported during the three months ended December 31, 2002. During the six months ended December 31, 2003,
 broker mortgage loan production through telemarketing and the Internet was $360.8 million, an increase
 of $221.4 million, or 158.8%, over the $139.4 million reported during the six months ended December
 31, 2002.

Through
 its "Broker Direct" program, the Company makes outbound telemarketing calls to brokers that have been
 inactive for the past 90 days and brokers who are not currently doing business with the Company or are
 outside the geographic areas served by the loan officers. The Company also obtains leads through its
 internet web site "Aamesdirect.com". The Company expects "Broker direct" to continue to generate an
 increasing dollar amount and percentage of broker loan production in the coming quarters as general
 market acceptance by brokers of broker telemarketing and Internet use grows and the Company continues
 to enhance its "Broker Direct" capabilities.

The
 following table sets forth the number of retail branches and broker operations centers operated by the
 Company at December 31, 2003 and 2002:

|                                   | December 31,
|---------------------------------- | ------------
|                                   |             
|                                   |             
|Retail branches                    |             
|National Loan Centers              |             
|Regional broker operations centers |             

Loan Securitizations and Sales. As a fundamental
 part of its business and financing strategy, the Company sells mortgage loans to third party investors
 in the secondary markets as market conditions allow. The Company generally seeks to dispose of substantially
 all of its loan production within 90 days. The Company applies the net proceeds of the loan dispositions,
 whether through securitizations or whole loan sales, to pay down its warehouse and repurchase facilities
 in order to make available capacity under these facilities for future funding of mortgage loans. The
 Company maximizes opportunities in its loan disposition transactions by selling its loan production
 through a combination of securitizations and whole loan sales, depending on market conditions, relative
 profitability and cash flows. The Company generally realizes higher gain on sale on securitization than
 it does on whole loan sales for cash. The higher gain on sale in securitization transactions is attributable
 to the excess servicing spread associated with retaining a residual interest in the securitization,
 net of transactional costs. In a securitization, the underlying pass-through certificates or bonds are
 generally overcollateralized by the Company depositing mortgage loans with a principal balance exceeding
 the principal balance of the pass-through certificates or bonds. The upfront overcollateralization required
 in securitizations is generally cash flow negative to the Company in the early years of the securitization.
 In whole loan sales with servicing released, the gain on sale is generally lower than gains realized
 in securitizations, but the Company receives the gain in the form of cash.

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During
 the three months ended December 31, 2003, total mortgage loan dispositions increased $528.5 million,
 or 44.6%, to $1.7 billion over the $1.2 billion of total loan dispositions reported during the three
 months ended September 30, 2003, and increased $538.7 million, or 45.8%, over the $1.2 billion of total
 loan dispositions during the three months ended December 31, 2002. Total loan dispositions during
 the six months ended December 31, 2003 increased $804.2 million, or 38.4%, to $2.9 billion over the
 $2.1 billion of total loan dispositions reported during the comparable six month period a year ago.
 All of the Companys $1.7 billion and $2.9 billion of loan dispositions during the three and six months
 ended December 31, 2003, respectively, were in the form of whole loan sales for cash. The Companys
 sole reliance on whole loan sales as its loan disposition strategy during the three and six months ended
 December 31, 2003 was due to attractive pricing conditions prevailing in the whole loan sale markets.
 During the three months ended December 31, 2002, loans sold in securitizations and whole loan sales
 for cash were $315.0 million and $861.0 million, respectively. During the six months ended December
 31, 2002, loans sold in securitizations and whole loan sales for cash were $315.0 million and $1.8 billion,
 respectively. Changes in the secondary mortgage markets, the current interest rate environment and the
 current economic climate could affect the mix in the composition of the Companys strategy of selling
 loans in the form of securitizations or whole loan sales.

In
 prior quarters, when the Company disposed of loans in securitization transactions, each agreement that
 the Company entered into in connection with such securitizations required either the overcollateralization
 of the trust or the establishment of a reserve account that may initially be funded by cash deposited
 by the Company. If delinquencies or losses exceed certain established limits, as applicable, certain
 additional credit-enhancement aspects of the trust are triggered. In a securitization credit-enhanced
 by a monoline insurance policy, any further losses experienced in excess of the established overcollateralization
 amount by holders of the senior interests in the related trust will be paid by the insurer under such
 policy. To date, there have been no claims on any monoline insurance policy obtained in any of the Companys
 securitizations. In a senior/subordinated structure, losses in excess of the overcollateralization amount
 generally are allocated first to the holders of the subordinated interests and then to the holders of
 the senior interests of the trust.

Loan Servicing. Servicing includes collecting
 and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers,
 managing borrower defaults and liquidating foreclosed properties. As a means to maximize cash flow from
 securitizations, the Company has, since January 2000, been selling the servicing rights in securitizations
 for cash. Moreover, the Company does not retain servicing on loans it sells in whole loan sale markets.

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The
 Companys servicing portfolio consists mainly of mortgage loans securitized prior to January 1, 2000
 for which the Company retained servicing and loans serviced on an interim basis, consisting of loans
 held for sale and loans subserviced for others on an interim basis.

The
 following table sets forth certain information regarding the Companys servicing portfolio at December
 31, 2003 and 2002 and June 30, 2003 (dollars in millions):

|                                   | December 31, | June 30,   
|---------------------------------- | ------------ | -----------
|                                   |              | 2003       
|Mortgage loans serviced:           |              |            
|Loans serviced on an interim basis |              | $   1,975.0
|Loans in securitization trusts     |              | 291.0      
|                                   |              |            
|Serviced in-house                  |              | 2,266.0    
|Loans in securitization trusts     |              |            
|subserviced by others              |              | 68.0       
|                                   |              |            
|Total servicing portfolio          |              | $   2,334.0
|                                   |              |            
|Percentage serviced in-house       |              | 97.1       
|                                   |              |            

Excluding
 loans serviced on an interim basis, the Company has not added any new loans to the servicing portfolio
 since January 1, 2000 due to the Companys sale of all of its mortgage loan production in whole loan
 sales and securitizations with servicing released since that time. The Companys total servicing portfolio
 at December 31, 2003 increased $594.0 million, or 34.1%, over $1.7 billion at June 30, 2003,
 reflecting an increase in loans serviced on an interim basis partially offset by a decline in loans
 in securitization trusts due to the Companys call of certain securitization trusts and loan servicing
 portfolio runoff, in the form of principal amortization, prepayments and liquidations. The Companys
 portfolio of mortgage loans serviced on an interim basis increased $1.1 billion to $2.0 billion at December 31,
 2003 over $911.0 million at June 30, 2003, and increased $1.0 billion over the $953.0 million of mortgage
 loans serviced on an interim basis at December 31, 2002. The increase at December 31, 2003 was
 attributable to the Companys increased mortgage loan production volumes resulting in higher loans held
 for sale serviced by the Company on its own behalf and to increased loan disposition volumes resulting
 in increased interim servicing for loan buyers who have not transferred the loans to new servicers.

The
 Companys portfolio of mortgage loans in securitization trusts serviced in-house, declined by $450.0
 million, or 60.7%, to $291.0 million at December 31, 2003 from $741.0 million at June 30, 2003 due primarily
 to the November Trust Call which caused the Companys portfolio of mortgage loans in securitization
 trusts to decline by $274.8 million and, to a lesser extent, portfolio run-off. The Companys $291.0
 million portfolio of mortgage loans in securitization trusts serviced in-house at December 31,
 2003 reflected a decrease of $1.1 billion, or 79.5%, from the $1.4 billion at December 31, 2002. The
 decrease is due to the Company calling seventeen securitization trusts and, to a lesser extent, to servicing
 portfolio run-off, in the form of principal amortization, prepayments and liquidations. In general,
 the Companys portfolio of mortgage loans in securitization trusts serviced in-house will continue to
 decline from run-off and as a result of all of its new mortgage loans being sold servicing released.

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Moreover,
 four of the remaining seven securitization trusts, which had a mortgage loan balance at December 31,
 2003 of $92.5 million out of $358.7 million in the total portfolio of mortgage loans in securitization
 trusts were callable at December 31, 2003. The Companys portfolio of mortgage loans in securitization
 trusts would be reduced further were the Company to decide to call any of these four securitization
 trusts.

The
 following table sets forth delinquency, foreclosure, and loss information of the Companys servicing
 portfolio at or during the periods indicated:

|                                                   | At or during the
|-------------------------------------------------- | ----------------
|                                                   |                 
|                                                   |                 
|                                                   |                 
|Percentage of dollar amount of delinquent loans to |                 
|loans serviced (period end)(1)(2):                 |                 
|One month                                          |                 
|Two months                                         |                 
|Three or more months:                              |                 
|Not foreclosed(3)                                  |                 
|Foreclosed(4)                                      |                 
|                                                   |                 
|Total                                              |                 
|                                                   |                 
|Percentage of total dollar amount of delinquent    |                 
|Loans in:                                          |                 
|Loans serviced on an interim basis                 |                 
|Loans in securitization trusts serviced in-house   |                 
|And by others                                      |                 
|Percentage of dollar amount of loans foreclosed    |                 
|during the period to servicing portfolio(2)(6)     |                 
|Number of loans foreclosed during the period       |                 
|Principal amount of foreclosed loans during the    |                 
|period                                             |                 
|Number of loans liquidated during the period       |                 
|Net losses on liquidations during the period(5)    |                 
|Percentage of annualized losses to servicing       |                 
|portfolio(2)(6)                                    |                 
|Servicing portfolio at period end                  |                 

_________________

|(1) |  | Delinquent loans are loans for which more than one payment is due.
|--- |  | ------------------------------------------------------------------

|(2) |  | The delinquency and foreclosure percentages are calculated on the basis of the total dollar amount of mortgage loans serviced by the Company, and any subservicers as of the end of the periods indicated, including loans serviced on an interim basis of $2.0 billion and $953.0 million at December 31, 2003 and 2002, respectively, and $911.0 million, $991.0 million and $722.0 million at June 30, 2003, 2002 and 2001, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|(3) |  | Represents loans which are in foreclosure but as to which foreclosure proceedings have not concluded.
|--- |  | -----------------------------------------------------------------------------------------------------

|(4) |  | Represents properties acquired following a foreclosure sale and still serviced by the Company at period end.
|--- |  | ------------------------------------------------------------------------------------------------------------

|(5) |  | Represents losses, net of gains, on properties sold through foreclosed or other default management activities during the period indicated.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | The percentages were calculated to reflect the dollar volume of loans foreclosed or annualized losses, as the case may be, to the average dollar amount of mortgage loans serviced by the Company and any subservicers during the related periods indicated.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
 Company has historically experienced delinquency rates that are higher than those prevailing in this
 industry due to the inclusion of lower credit grade mortgage loans in the securitization trusts. Delinquent
 loans (by principal balance) decreased at December 31, 2003 to $88.5 million from $156.5 million
 at June 30, 2003 and from $191.5 million at December 31, 2002. Total delinquent loans in the Companys
 portfolio of securitization trusts (serviced in-house and by others) were $73.1 million and $144.3 million
 at December 31, 2003 and June 30, 2003, respectively, and were $175.3 million at December 31, 2002.
 Total delinquent loans in the Companys portfolio of loans serviced on an interim basis were $15.5 million
 and $12.2 million at December 31, 2003 and June 30, 2003, respectively, and were $16.2 million
 at December 31, 2002.

The
 delinquency rate at December 31, 2003 was 3.8% compared to 9.0% at June 30, 2003 and 7.7% at December
 31, 2002. The delinquency rate at December 31, 2003 declined from the delinquency rate at June 30,
 2003 due to the fact that loans in the Companys portfolio of mortgage loans in securitization trusts,
 which contains the majority of delinquent loans, became a smaller part of the Companys total servicing
 portfolio, primarily as a consequence of the November Trust Call. A decline in delinquencies generally
 reduces the Companys servicing advance obligations. The Company expects the delinquency rate to continue
 to decline as the Companys portfolio of mortgage loans in securitization trusts (and the number of
 delinquent loans in such trusts) continues to decline and become a smaller component of the Companys
 total servicing portfolio.

During
 the six months ended December 31, 2003, losses on loan liquidations decreased to $10.2 million
 from $20.0 million during the comparable six month period a year ago primarily due to the decrease in
 the number of loans liquidated. Substantially all of the foreclosures and liquidations handled by the
 Company occur in connection with the Companys portfolio of mortgage loans in securitization trusts.
 The Company expects net losses on loan liquidations to continue to decline as the Companys portfolio
 of mortgage loans in securitization trusts (and the number of foreclosed loans in such trusts) continues
 to decline.

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Because
 foreclosures and credit losses typically occur months or years after a loan is originated, data relating
 to delinquencies, foreclosures and credit losses as a percentage of the current portfolio can understate
 the risk of future delinquencies, foreclosures or credit losses.

In
 the case of securitizations credit-enhanced by monoline insurance, the agreements also typically provide
 that the Company may be terminated as servicer by the monoline insurance company (or by the trustee
 with the consent of the monoline insurance company) upon certain events of default, including the Companys
 failure to perform its obligations under the servicing agreement, the rate of over 90-day delinquent
 loans (including properties acquired by foreclosure and not sold) exceeding specified limits, losses
 on liquidation of collateral exceeding certain limits, any payment being made by the monoline insurance
 company under its policy, and events of bankruptcy or insolvency. Pursuant to agreements relating to
 the Companys two 1999 securitization trusts, the monoline insurer requires the Company to maintain
 a specified net worth and level of liquidity in order to be able to continue to service the loans in
 those securitization trusts. Previously, the Company did not satisfy the net worth test and, as a result,
 the monoline insurer could have terminated the Company as servicer with respect to those securitization
 trusts. The monoline insurer waived the Companys failure to satisfy the net worth test and none of
 the servicing rights of the Company were terminated. At December 31, 2003, the Company met the specified
 net worth and liquidity tests.

The
 table below illustrates certain information regarding those securitization trusts that have exceeded
 delinquency and loss triggers at December 31, 2003 (dollars in thousands):

|                                            | December 31, 2003
|------------------------------------------- | -----------------
|Securitization trusts:                      |                  
|Number                                      |                  
|Total dollar amount of mortgage loans       |                  
|serviced in securitization trusts (in-house |                  
|and subserviced)                            |                  
|Securitization trusts where the Company may |                  
|be terminated as servicer:                  |                  
|Number                                      |                  
|Dollar amount of mortgage loans serviced    |                  
|in securitization trusts (in-house and      |                  
|subserviced)                                |                  
|Percentage of total dollar amount of        |                  
|mortgage loans serviced in securitization   |                  
|trusts (in-house and subserviced)           |                  

The
 Companys servicing portfolio will continue to be impacted in the future by the Companys dispositions
 of its loan production through whole loan sales and securitizations on a servicing released basis, which
 has resulted in a smaller servicing portfolio.

Critical Accounting Policies

The
 Company retained the residual interests created in all of the $7.0 billion of securitizations which
 closed prior to and during the year ended June 30, 2000. The Company did not retain residual interests
 created in any of its securitizations since January 1, 2000. During the three months ended December
 31, 2003, the Company did not dispose of any of its loans through a securitization.

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The
 Company sells its loans in whole loan sale transactions on a cash basis. In whole loan sale transactions,
 the buyer acquires all future rights, including mortgage servicing rights, to the loans, without recourse
 to the Company except for standard representations and warranties, including a requirement that borrowers
 make their first payment subsequent to the transfer of servicing. Gains and losses on whole loan sales
 are recognized when the Company surrenders control over the loans, generally on the settlement date,
 based upon the difference between the proceeds received and the net carrying amount of the loans.

Accounting for Securitizations. The Companys
 loan disposition strategy relies on a combination of securitization transactions and whole loan sales.
 The following discusses certain accounting considerations which arise only in the context of securitization
 transactions.

In
 a securitization, the Company conveys loans that it has originated, and formerly purchased, to a special
 purpose entity (such as a trust) in exchange for cash proceeds and a residual interest in the trust.
 The cash proceeds are raised through an offering of the pass-through certificates or bonds evidencing
 the right to receive principal payments and interest on the certificate balance or on the bonds. The
 non-cash gain on sale of loans represents the difference between the portion sold and any retained interests
 (residual interests) based on their relative fair values at the date of transfer. The residual interests
 represent, over the estimated life of the loans, the present value of the estimated cash flows. These
 cash flows are determined by the excess of the weighted average coupon on each pool of loans sold over
 the sum of the interest rate paid to investors, the contractual servicing fee, a monoline insurance
 fee, if any, and an estimate for credit losses. Each agreement that the Company has entered into in
 connection with its securitizations requires the overcollateralization of the trust that may initially
 be funded by cash deposited by the Company. The amount and timing of the cash flows expected to be released
 from the securitization trusts considers the impact of the applicable delinquency and credit loss limits
 specified in the securitization agreements.

The
 Company determines the present value of the cash flows at the time each securitization transaction closes
 using certain estimates made by management at the time the loans are sold. These estimates include:
 (i) future rate of prepayment; (ii) credit losses; and (iii) discount rate used to calculate
 present value. The future cash flows represent managements best estimate. Management monitors the performance
 of the loans, and any changes in the estimates are reflected in earnings. There can be no assurance
 of the accuracy of managements estimates.

The
 Companys retained residual interests are recorded at estimated fair value and are marked to market
 through a charge (or credit) to earnings. On a quarterly basis, the Company reviews the fair value of
 its retained residual interests by analyzing its prepayment, credit loss and discount rate assumptions
 in relation to its actual experience and current rates of prepayment and credit loss prevalent in the
 industry. Additionally, on a quarterly basis, the Company evaluates the effects, if any, that increasing
 or decreasing interest rates might have on its retained residual interests. The Company may adjust the
 value of its retained residual interests or take a charge to earnings related to its retained residual
 interests, as appropriate, to reflect a valuation or write-down of its residual interests based upon
 the actual performance of the Companys retained residual interests as compared to the Companys key
 assumptions and estimates used to determine fair value. Although management believes that the assumptions
 used to estimate the fair values of its retained residual interests are reasonable, there can be no
 assurance as to the accuracy of the assumptions or estimates.

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Rate of Prepayment. The estimated life
 of the securitized loans depends on the assumed annual prepayment rate which is a function of estimated
 voluntary (full and partial) and involuntary (liquidations) prepayments. The prepayment rate represents
 managements expectations of future prepayment rates based on prior and expected loan performance, the
 type of loans in the relevant pool (fixed or adjustable rate), the production channel which produced
 the loan, prevailing interest rates, the presence of prepayment penalties, the loan-to-value ratios,
 the credit grades of the loans included in the securitization and other industry data. The rate of prepayment
 may be affected by a variety of economic and other factors including, but not limited to, a declining
 mortgage interest rate environment.

Credit Losses. In determining the estimate
 for credit losses on loans securitized, the Company uses assumptions that it believes are reasonable
 based on information from its prior securitizations, the loan-to-value ratios and credit grades of the
 loans included in the securitizations, loss and delinquency information by origination channel, and
 information available from other market participants such as investment bankers, credit providers and
 credit rating agencies. On a quarterly basis, the Company re-evaluates its credit loss estimates.

Discount Rate. In order to determine the
 fair value of the cash flow from the residual interests, the Company discounts the cash flows based
 upon rates prevalent in the market.

The
 following table summarizes certain information about the securitization trusts in which the Company
 had retained a residual interest at December 31, 2003 and June 30, 2003 (dollars in thousands):

|                                                                            | December 31, 2003 | June 30, 2003
|--------------------------------------------------------------------------- | ----------------- | -------------
|Aggregate principal balances of securitized loans at the time of the        |                   | $7,016,205   
|securitizations                                                             |                   |              
|Outstanding principal balances of securitized loans                         |                   | $   358,691  
|Outstanding principal balances of pass-through certificates or bonds of the |                   |              
|securitization trusts                                                       |                   | $   294,984  
|Weighted average coupon rates of:                                           |                   |              
|Securitized loans                                                           |                   | 10.10        
|Pass-through certificates or bonds                                          |                   | 5.64         









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Certain
 historical data and key assumptions and estimates used by the Company in its December 31, 2003
 and June 30, 2003 review of the residual interests retained by the Company were as follows:

|                                                                                | December 31, 2003 | June 30, 2003 
|------------------------------------------------------------------------------- | ----------------- | --------------
|Prepayments:                                                                    |                   |               
|Actual weighted average annual prepayment rate, as a percentage of outstanding  |                  
|principal balances of securitized loans                                         |                  
|Fixed rate loans                                                                |                   | 36.6          
|Adjustable rate loans                                                           |                   | 35.2          
|Estimated annual prepayment rates, as a percentage of outstanding principal     |                   |               
|balances of securitized loans:                                                  |                   |               
|Fixed rate loans                                                                |                   | 24.3% to 57.1%
|Adjustable rate loans                                                           |                   | 18.8% to 46.8%
|Estimated weighted average life of securitized loans                            |                   | 1.8 years     
|Credit losses:                                                                  |                   |               
|Actual credit losses to date, as a percentage of original principal balances of |                   |               
|securitized loans                                                               |                   | 5.2           
|Future estimated credit losses, as a percentage of original principal balances  |                   |               
|of securitized loans                                                            |                   | 0.6           
|Total actual and estimated prospective credit losses, as a percentage of        |                   |               
|original principal balance of securitized loans                                 |                   | 5.8           
|Total actual credit losses to date and estimated prospective credit losse       |                   |               
|(dollars in thousands)                                                          |                   | $ 188,629     
|Weighted average discount rate                                                  |                   | 13.7          

To
 estimate the effects of changes in interest rates on the coupon rates of the adjustable rate mortgage
 loans, the Company considers current underlying indices, periodic interest rate caps, lifetime interest
 rate caps and contractual interest rate floors. In determining the interest rates for the floating rate
 pass-through certificates in the securitization trusts, the Company uses each certificates specific
 spread over the one-month LIBOR.

The
 total actual and estimated credit losses, as a percentage of original principal balance of securitized
 loans in each securitization trust, ranged from 4.5% to 6.8% at December 31, 2003 and 3.9% and 9.3%
 at June 30, 2003. Actual and estimated credit losses vary between securitization trusts due to
 differing credit quality, i.e., credit grade, production channel and other factors considered by the
 Company when evaluating credit loss estimates.

The
 Company has previously disclosed that if actual credit losses and actual prepayment trends exceeded
 the Companys credit loss and prepayment rate assumptions, it would be required to adjust earnings to
 reflect changes in its credit loss and prepayment assumptions. In its regular quarterly review of its
 residual interests during the three months ended December 31, 2003, the Company considered the historical
 performance of its securitized pools, the recent prepayment experience of loans in those pools, the
 credit loss performance of loans in previously securitized pools, other industry data and economic factors
 prevailing in the U.S. economy. During the three months ended December 31, 2003, no adjustment to the
 Companys assumptions (rate of prepayment, credit loss and discount rate) was deemed warranted.

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Additionally,
 as master servicer of the mortgage loans in the securitization trusts, the Company has the right to
 call the securitization trusts when the remaining balance of the mortgage loans sold in the securitization
 trusts falls below 10.0% of the original mortgage loan balance. In the November Trust Call, the Company
 called six securitization trusts. The carrying value of the residual interests of the securitization
 trusts in the November Trust Call were not materially affected by calling those trusts. If the Company
 calls any of its seven remaining securitization trusts, it might be required to write down the value
 of the residual interests relating to the called securitization trusts.

As
 previously reported, during the three months ended December 31, 2002, the Companys credit losses on
 loan liquidations declined; however, the Company experienced higher than expected loss severity on loan
 liquidations. Therefore, the Company increased its credit loss assumptions used to estimate the fair
 value of the retained residual interests. Additionally, during the three months ended December 31, 2002,
 the Company experienced higher than planned prepayment activity in its securitization trusts due to
 the low mortgage interest rate environment prevailing in the United States. Accordingly, the Company
 changed its annual prepayment rate assumptions used in estimating the fair value of the retained residual
 interests. The Company also adjusted the underlying forward interest rate curve assumptions used to
 estimate the fair value of the retained residual interests. The effect of these changes in estimates
 resulted in a $31.9 million write-down to the carrying value of the Companys residual interests during
 the three and six months ended December 31, 2002.

The
 Company closely monitors its residual interests. Should the actual rate of prepayment and credit loss
 performance of loans in its securitized pools vary adversely in relation to the estimates and assumptions
 used by the Company to estimate the fair value, the Company will adjust the fair value of the retained
 residual interests through a charge to earnings.

Mortgage Servicing Rights.During the
 three and six months ended December 31, 2003 and 2002, all of the Companys loan dispositions were on
 a servicing released basis; therefore, the Company did not capitalize mortgage servicing rights (MSRs).
 Prior to June 30, 2000, the Company capitalized MSRs based on an allocation of the carrying amount of
 the loans securitized on a servicing retained basis. However, such MSRs were fully amortized at December
 31, 2003.

Accounting for Income Taxes. Taxes are
 provided on substantially all income and expense items included in earnings, regardless of the period
 in which such items are recognized for tax purposes. The Company uses an asset and liability approach
 that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences
 of events that have been recognized in the Companys financing statements or tax returns. In estimating
 future tax consequences, the Company generally considers all expected future events other than the enactment
 of changes in the tax law or rates.

Deferred
 income tax assets and liabilities are recognized to reflect the future tax consequences of net operating
 loss carry forwards and differences between the tax basis and financial reporting basis of assets and
 liabilities. The Company has recognized that it is more likely than not that certain future tax benefits,
 primarily net operating loss carry forwards, will be realized as a result of current and future income.
 Accordingly, during the three and six months ended December 31, 2003, the Company decreased its
 deferred tax valuation allowance to recognize higher than previously anticipated net deferred tax assets.

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Results of Operations  Three and Six Months
 Ended December 31, 2003 and 2002

The
 following table sets forth information regarding the components of the Companys revenue and expenses
 for the three months ended December 31, 2003 and 2002:

|                                       | Three Months EndedDecember 31, | Six Months EndedDecember 31,
|-------------------------------------- | ------------------------------ | ----------------------------
|                                       |                                | 2003                        
|                                       |                                |                             
|Revenue:                               |                                |                             
|Gain on sale of loans                  |                                | $50,624                     
|Write-down of residual interests       |                                | --                          
|Origination fees                       |                                | 15,996                      
|Loan servicing                         |                                | 2,177                       
|Debt extinguishment income             |                                | --                          
|Interest                               |                                | 17,317                      
|                                       |                                |                             
|Total revenue, including write-down of |                                |                             
|Residual interests                     |                                | 86,114                      
|                                       |                                |                             
|Expenses:                              |                                |                             
|Personnel                              |                                | 42,864                      
|Production                             |                                | 8,347                       
|General and administrative             |                                | 12,322                      
|Interest                               |                                | 5,184                       
|                                       |                                |                             
|Total expenses                         |                                | 68,717                      
|                                       |                                |                             
|Income before provision for income     |                                |                             
|Taxes                                  |                                | 17,397                      
|Provision (benefit) for income taxes   |                                |                             
|                                       |                                | 217                         
|                                       |                                |                             
|Net income                             |                                | $17,180                     
|                                       |                                |                             









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The
 following table reconciles total revenue in conformity with generally accepted accounting principles
 (GAAP) to operating revenue as discussed herein and elsewhere. See Item 1  Business  Recent Events:

|                                      | Three Months EndedDecember 31, | Six Months EndedDecember 31,
|------------------------------------- | ------------------------------ | ----------------------------
|                                      |                                | 2003                        
|                                      |                                |                             
|GAAP revenue                          |                                | $86,114                     
|Add: Write-down of residual interests |                                | --                          
|Less: Debt extinguishment income      |                                | --                          
|                                      |                                |                             
|Operating revenue                     |                                | $86,114                     
|                                      |                                |                             

---









Revenue

General. Total revenue during the three
 months ended December 31, 2003 increased $22.1 million to $86.1 million from $64.0 million
 during the comparable three month period a year ago. During the three months ended December 31, 2003,
 the Company did not record debt extinguishment income and did not write down its residual interests.
 However, total revenue during the three months ended December 31, 2002 includes $26.0 million of debt
 extinguishment income and a $31.9 million write down of residual interests. Excluding debt extinguishment
 income and the residual interest write-down during the three months ended December 31, 2002, operating
 revenue during the three months ended December 31, 2003 increased $16.2 million, or 23.2%, to $86.1
 million over $69.9 million during the same three month period a year ago. This increase was primarily
 attributable to increases of $18.1 million and $1.7 million in gain on sale of loans and origination
 fees, respectively, partially offset by declines of $3.4 million and $0.2 million in interest income
 and loan servicing income, respectively, during the three months ended December 31, 2003 from amounts
 reported during the comparable three month period during 2002.

Total revenue during the six months ended December
 31, 2003 was $159.4 million, an increase of $28.0 million, or 21.3%, over total revenue of $131.4 million
 during the six months ended December 31, 2002. During the six months ended December 31, 2003, the Company
 did not record debt extinguishment income and did not write down its residual interests. However, total
 revenue during the six months ended December 31, 2002 includes $27.1 million of debt extinguishment
 income and a $31.9 million write down of residual interests. Excluding debt extinguishment income and
 the residual interest write-down during the six months ended December 31, 2002, operating revenue during
 the six months ended December 31, 2003 increased $23.2 million, or 17.0%, to $159.4 million over $136.2
 million during the same three month period a year ago. This increase was primarily attributable to increases
 of $26.0 million and $4.7 million in gain on sale of loans and origination fees, respectively,
 partially offset by declines of $6.8 million and $0.9 million in interest income and loan servicing
 income, respectively, during the six months ended December 31, 2003 from amounts reported during
 the comparable three month period during 2002.

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Gain on Sale of Loans. Gain on sale of
 loans during the three months ended December 31, 2003 increased $18.1 million, or 55.6%, to $50.6 million
 over $32.5 million during the three months ended December 31, 2002. The increase in gain on sale
 of loans resulted primarily from the $528.5 million, or 44.6%, increase to $1.7 billion of total
 loan dispositions during the three months ended December 31, 2003 over $1.2 billion of total loan dispositions
 during the comparable three month period a year ago, partially offset by lower gain on sale rates on
 loan sales during the quarter ended December 31, 2003 compared to the comparable period a year
 ago. The increase in loan dispositions during the December 2003 quarter over loan dispositions during
 the December 2002 quarter was due primarily to an increase in mortgage loan production and, to a lesser
 extent, to quicker dispositions by the Company of its mortgage loan production during the December 2003
 quarter compared to the December 2002 quarter. During the three months ended December 31, 2003, the
 Company relied solely on whole loan sales for cash as its loan disposition strategy based upon the Companys
 review of market conditions, profitability and cash flow requirements. In comparison, during the three
 months ended December 31, 2002, of the $1.2 billion of total loan dispositions, $315.0 million and $861.0
 million of mortgage loans were disposed of in securitizations and whole loan sales for cash, respectively.

The
 gain on sale rates realized by the Company on whole loan sales were generally higher during the three
 months ended December 31, 2003 compared to the gain on sale rates for whole loan sales during the comparable
 three month period a year ago due to generally more favorable conditions in the whole loan markets during
 the December 2003 quarter when compared to market conditions during the December 2002 quarter.

Included
 in gain on sale of loans during the three months ended December 31, 2002 was $8.6 million realized by
 the Company on its sale for cash of the residual interest created in the securitization during the period
 to Capital Z Investments, L.P., a Bermuda partnership (CZI), an affiliate of Capital Z, the Companys
 largest stockholder, under a Residual Forward Sale Facility (Residual Facility). During the three
 months ended December 31, 2002, gain on sale of loans includes $4.1 million of cash proceeds from the
 sale of mortgage servicing rights and the rights to the prepayment fee income sold to an unaffiliated
 independent mortgage servicing company related to the securitization which closed during the period.
 Gain on sale of loans during the three months ended December 31, 2002 was reduced by amortization of
 capitalized costs related to obtaining the Residual Facility of $0.4 million, substantially all of which
 related to the amortization of the facility fee paid to CZI. The Residual Facility with CZI expired
 on March 31, 2003.

At
 and during the three months ended December 31, 2003, the Company had no hedge instruments in place.
 During the three months ended December 31, 2002, the Company, as it has from time to time, entered into
 forward interest rate swap agreements designed to mitigate interest rate exposure to mortgage loans
 in its inventory and pipeline in anticipation of closing loan disposition transactions during that period.
 Gain on sale of loans during the three months ended December 31, 2002 included charges of $2.8 million
 of derivative related losses which was comprised of $1.8 million of losses on hedge positions that closed
 during the period and $1.0 million to mark open hedge positions at December 31, 2002 to their estimated
 fair value.

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Gain
 on sale of loans increased $26.1 million, or 40.7%, to $90.1 million during the six months ended December
 31, 2003 over $64.1 million of gain on sale of loans during the six months ended December 31, 2002.
 The increase in gain on sale of loans during the six months ended December 31, 2003 over gain on sale
 of loans during the comparable six month period a year ago resulted from the $804.2 million increase
 in total mortgage loan dispositions during the six months ended December 31, 2003 over mortgage loan
 dispositions levels reported during the comparable period a year ago, partially offset by the lower
 gain on sale rates realized by the Company on whole loan sales during the six months ended December
 31, 2003, compared to the gain on sale rates realized on its mix of whole loan and securitization dispositions
 during the comparable six month period a year ago. During the six months ended December 31, 2003, the
 Company relied solely on whole loan sales for cash as its loan disposition strategy. In comparison,
 during the six months ended December 2002, the Company relied on a combination of securitizations and
 whole loan sales for cash as its loan disposition strategy based on the Companys review of market conditions,
 profitability and cash flow needs and the Companys desire at that time to retain capacity under the
 Residual Facility.

Gain
 on sale of loans during the six months ended December 31, 2002 includes $8.6 million of cash proceeds
 from the sale of residual interests to CZI under the Residual Facility. In addition, gain on sale of
 loans during the six months ended December 31, 2002 includes $4.1 million of cash proceeds from the
 sale of mortgage servicing rights and the rights to prepayment fee income that were sold to an unaffiliated
 independent mortgage servicing company related to the securitization which closed during the period.
 At and during the six months ended December 31, 2003, the Company had no hedge instruments in place.
 Gain on sale of loans during the six months ended December 31, 2002 was reduced by $10.7 million of
 hedge losses on closed hedge positions. Finally, gain on sale of loans during the six months ended December
 31, 2002 was reduced by the amortization of $0.6 million of costs related to obtaining the Residual
 Facility, substantially all of which related to amortization of the remaining capitalized facility fee
 paid to CZI.

Origination Fees. Origination fees are
 primarily comprised of points and other fees, which include appraisal and credit investigation fees,
 charged by the Company on mortgage loans originated by the Companys retail channel, partially offset
 by broker compensation, generally referred to as yield spread premium, paid by the Company to mortgage
 loan brokers in connection with broker loan production. Retail points and fees are primarily a function
 of the volume of mortgage loans originated by the Company through its retail channel and the points
 charged on such loans. Yield spread premiums are generally a function of the volume of mortgage loans
 originated by the Company through its broker channel and fees paid on such loans by the Company to referring
 brokers net of points and fees received at origination.

Origination
 fees during the three months ended December 31, 2003 were $16.0 million as compared to $14.3 million
 during the three months ended December 31, 2002. The $1.7 million, or 11.7%, increase in origination
 fees during the three months ended December 31, 2003 from the amount reported during the comparable
 three month period during 2002 was attributable primarily to a $3.5 million, or 19.8%, increase in retail
 origination fees charged at the time of origination in the retail channel, partially offset by a $1.4
 million, or 33.6%, increase in yield spread premium, net of points and fees paid by the broker channel.
 Retail origination fees increased $3.5 million to $21.3 million during the three months ended December
 31, 2003 over $17.7 million during the comparable three month period a year ago. The $21.3 million increase
 in retail origination fees is primarily due to the $75.6 million, or 14.7%, increase in total retail
 mortgage loan production during the three months ended December 31, 2003 over total retail mortgage
 loan production during the three months ended December 31, 2002. Retail points and fees, expressed as
 a percentage of retail volume, during the three months ended December 31, 2003 and 2002 were 3.59%
 and 3.45%, respectively. As previously reported, the Company has, primarily in response to competitive
 factors and, to a lesser extent, recent regulatory changes, reduced points and fees charged to customers
 in numerous states and for certain loan products.

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Yield
 spread premium, net of points and fees, increased $1.4 million to $5.4 million during the three months
 ended December 31, 2003 over $4.0 million during the same three month period a year ago. The $1.4 million
 increase in yield spread premium, net of points and fees, is primarily due to the $277.1 million, or
 35.1%, increase in total broker mortgage loan production during the three months ended December 31,
 2003 over such production during the same three month period a year ago. Average yield spread premium,
 net of points and fees, expressed as a percentage of total broker production was 0.50% and 0.51% during
 the three months ended December 31, 2003 and 2002, respectively.

Origination
 fees during the six months ended December 31, 2003 were $32.4 million, an increase of $4.7 million,
 or 17.1%, over the $27.7 million reported during the six months ended December 31, 2002. The increase
 in origination fee revenue during the six months ended December 31, 2003 over origination fee revenue
 during the comparable six month period a year ago is primarily attributable to an increase in points
 and fees charged at the time of origination in the retail channel, partially offset by an increase in
 yield spread premium, net of points and fees, paid by the broker channel. The increase in retail points
 and fees was attributable to the $200.2 million, or 20.7%, increase in total retail production during
 the six months ended December 31, 2003 over total retail production during the comparable six month
 period a year ago. Retail points and fees, expressed as a percentage of retail volume increased to 3.52%
 from 3.45% during the six months ended December 31, 2003. The increase in points and fees charged by
 the retail channel was partially offset by an increase in the yield spread premium paid by the broker
 channel.

Yield
 spread premium, net of points and fees, paid by the broker channel increased $2.4 million to $9.0 million
 during the six months ended December 31, 2003 over the $6.5 million of yield spread premium paid during
 the same six month period a year ago. The increase in the yield spread premium is primarily due to the
 $680.8 million, or 52.1%, increase in total broker production during the 2003 period over total broker
 production during the comparable period in 2002, and, to a lesser extent, due to an increase in average
 yield spread premium during the six months ended December 31, 2003 over the average yield spread
 premium during the six months ended December 31, 2002. Average yield spread premium, net of points
 and fees, expressed as a percentage of total broker production declined to 0.45% from 0.50% during the
 six months ended December 31, 2002.

Loan Servicing. Loan servicing revenue
 consists of prepayment fees, late charges and other fees retained by the Company and servicing fees
 earned on securitized pools, reduced by subservicing costs related to servicing advance arrangements
 and amortization of the Companys MSRs. See  Critical Accounting Policies. Loan servicing revenue
 was $2.2 million during the three months ended December 31, 2003 compared to $2.3 million during
 the comparable three month period in 2002. During the three months ended December 31, 2003, servicing,
 late and prepayment fees declined $0.9 million from amounts reported during the comparable three
 month period a year ago. The decline was due primarily to the $1.1 billion decrease in the size of the
 Companys portfolio of mortgage loans in securitization trusts serviced in-house at December 31, 2003
 compared to December 31, 2002, together with a decrease in prepayment fees due to the aging of
 loans in the servicing portfolio beyond the term of their prepayment fee. This was partially offset
 by a $0.8 million decline in subservicing related expenses and MSR amortization expense during the three
 months ended December 31, 2003 from the amounts reported during the three months ended December 31,
 2002. During the three months ended December 31, 2003, the Company did not record any MSR amortization
 as its MSRs were fully amortized at September 30, 2003. The Company expects subservicing expense to
 trend downward in future periods as the balance of loans subserviced declines and expects to continue
 to sell all of its loan production on a servicing released basis.

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Loan
  servicing revenue during the six months ended December 31, 2003 decreased $0.9
  million to $4.2 million from $5.1 million during the six months ended December
  31, 2002 due primarily to declines in servicing, late and prepayment fees aggregating
  $2.3 million, partially offset by declines in subservicing related expenses
  and amortization of MSRs of $0.2 million and $1.2 million, respectively. The
  declines in servicing, late and prepayment fees during the six months ended
  December 31, 2003 from the levels reported during the six months ended December
  31, 2002 are due to the $1.1 billion decrease in the size of the Companys
  portfolio of mortgage loans in securitization trusts serviced in-house at December
  31, 2003 compared to December 31, 2002, together with a decrease in prepayment
  fees due to the aging of mortgage loans in securitization trusts serviced in-house
  beyond the term of their prepayment fee. Subservicing related expenses are declining
  due to the decrease in the number of loans being subserviced and the portfolio
  of mortgage loans in securitization trusts serviced in-house. The Company's
  MSRs were fully amortized at September 30, 2003.

During
 the three and six months ended December 31, 2003 and 2002, the Company had in place an arrangement,
 entered into during the year ended June 30, 1999, designed to reduce its servicing advance obligations
 pursuant to which a loan servicing company purchased certain advances and agreed to make future advances
 with respect to an aggregate $388.0 million ($68.0 million at December 31, 2003) in principal amount
 of loans.

Excluding
 loans serviced on an interim basis, the Company has not added any new loans to the servicing portfolio
 since January 1, 2000 due to the Companys sale of its entire mortgage loan production in whole loan
 sales for cash and securitizations with servicing released since that time. The Companys total loan
 servicing portfolio at December 31, 2003 increased $594.0 million, or 34.1%, to $2.3 billion over $1.7
 billion at June 30, 2003, reflecting an increase in loans serviced on an interim basis, offset by loan
 servicing portfolio runoff and by the November Trust Call involving $274.8 million of mortgage loans
 during the period. Mortgage loans in securitization trusts serviced by the Company in-house declined
 $450.0 million to $291.0 million at December 31, 2003 from $741.0 million at June 30, 2003. Moreover,
 subsequent to December 31, 2003, the Company transferred to the purchasers or their designated servicers
 approximately $641.3 million of loans, which represented loans sold in whole loan sales during the December
 2003 quarter but subserviced by the Company at December 31, 2003 on an interim basis. The Companys
 servicing portfolio will continue to be impacted in the future by the Companys dispositions of its
 loan production through whole loan sales and securitizations on a servicing released basis, which has
 resulted in a smaller servicing portfolio. Future loan servicing revenue will be negatively impacted
 by continued run-off in the Companys portfolio of mortgage loans in securitization trusts due to the
 Companys sale of mortgage loans on a servicing released basis. Run-off in the Companys portfolio of
 mortgage loans in securitization trusts could be further exacerbated by the current mortgage interest
 rate environment which could accelerate prepayment activity of loans. Finally, the Companys servicing
 portfolio and future servicing revenue will be adversely effected if the Company calls any of the remaining
 securitization trusts.

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Debt Extinguishment Income. The Company
 did not record any debt extinguishment income during the three and six months ended December 31, 2003.

As
 previously reported, during the three months ended December 31, 2002, the Company recorded $26.0 million
 of debt extinguishment income comprised of $25.0 million related to SFPs forgiveness of its holdings
 of the Companys 5.5% Convertible Subordinated Debentures due 2012 (New Debentures) and $1.0 million
 of debt extinguishment income recognized in connection with the Companys extinguishment of $11.5 million
 of its 9.125% Senior Notes due 2003 (Senior Notes) at a discount from par for $10.5 million of cash.

As
 also previously disclosed, during the six months ended December 31, 2002, debt extinguishment income
 was $27.1 million which included the $26.0 million discussed immediately above plus $1.1 million related
 to the Companys purchase of $7.5 million face amount of its Senior Notes for $6.4 million of cash during
 the three months ended September 30, 2002.

Interest Income. Interest income includes
 interest on loans held for sale, discount accretion income related to the Companys residual interests
 and interest on short-term overnight investments. Interest income during the three months ended December
 31, 2003 decreased by $3.4 million to $17.3 million from $20.7 million during the three months ended
 December 31, 2002. Interest income decreased by $6.8 million to $32.6 million during the six months
 ended December 31, 2003 from $39.4 million during the six months ended December 31, 2002. The decreases
 in interest income during the three and six months ended December 31, 2003 from the amounts reported
 during the comparable three and six month periods a year ago were primarily due to declines of $3.6
 million and $6.3 million, respectively, in discount accretion income recognized on the Companys residual
 interests. The Companys residual interests were at lower balances during the three and six months ended
 December 31, 2003 when compared to residual interest levels during the same three and six month periods
 a year ago. Partially offsetting the decrease in discount accretion income during the three months ended
 December 31, 2003 from the amount reported during the same period a year ago was an increase of $0.2
 million in interest income on loans held for sale during the three months ended December 31, 2003 over
 such interest income levels reported during the comparable period a year ago. The increase in interest
 income on loans held for sale during the three months ended December 31, 2003 over the amount reported
 during the comparable period a year ago is attributable to higher outstanding balances of loans held
 for sale despite such loans having lower weighted average coupon rates during the three months ended
 December 31, 2003 when compared to such balances and coupon rates during the same period a year ago.
 Coupled with the decrease in discount accretion during the six months ended December 31, 2003 from
 the amount reported during the same period a year ago was a decrease of $0.5 million in interest income
 on loans held for sale during the six months ended December 31, 2003 from the interest income level
 reported during the comparable period a year ago. The decrease in interest income on loans held for
 sale during the six months ended December 31, 2003 from the amount reported during the comparable
 period a year ago is attributable to a lower weighted average rate on loans held for sale, despite a
 higher outstanding balance of loans during the six month period ended December 31, 2003 when compared
 to such coupon rates and balances during the same period a year ago.

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Expenses

General. Total expenses during the three
 months ended December 31, 2003 were $68.7 million compared to $60.3 million during the three months
 ended December 31, 2002. The $8.4 million increase in total expenses during the three months ended December
 31, 2003 over total expenses during the comparable period in 2002 was attributable to increases of $7.2
 million, $2.7 million and $1.4 million in personnel expense, production and general and administrative
 expense, respectively, partially offset by a decline of $2.9 million in interest expense.

Total
 expenses during the six months ended December 31, 2003 were $131.5 million compared to $117.2 million
 during the six months ended December 31, 2002. The $14.3 million increase in total expenses during the
 six months ended December 31, 2003 over total expenses during the comparable period a year ago was attributable
 to increases of $14.0 million, $4.0 million and $3.4 million in personnel, production and general and
 administrative expenses, respectively, partially offset by a decline of $7.1 million in interest expense.

Personnel. Personnel expense includes
 salaries, payroll taxes and medical and other employee benefits. Personnel expense also includes commissions
 that are related to the Companys loan origination volume, as retail and broker account executives earn
 incentives on funded loans. Total personnel expense during the three months ended December 31, 2003
 increased $7.2 million, or 20.2%, to $42.9 million from $35.7 million during the three months ended
 December 31, 2002. The increase was comprised primarily of a $3.6 million increase in commission compensation
 earned by retail and broker account executives during the three months ended December 31, 2003
 over the same period a year ago due to the $352.8 million, or 27.0%, increase in total production during
 the three months ended December 31, 2003 over total production during the three months ended December
 31, 2002. In addition, the increase was due to $2.4 million of increased salaries resulting from increased
 staffing levels, predominantly in loan production personnel, during the three months ended December
 31, 2003 over staffing levels during the comparable three month period a year ago. Incentive compensation
 related to senior and other management increased $0.5 million during the three months ended December
 31, 2003 over the three months ended December 31, 2002. Finally, payroll taxes, medical and other benefit
 costs increased $0.7 million during the three months ended December 31, 2003 over such expense amounts
 incurred during the three months ended December 31, 2002.

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Personnel
 expense during the six months ended December 31, 2003 was $80.9 million compared to $66.9 million during
 the six months ended December 31, 2002. Salaries, commissions, bonuses and incentives increased $12.3
 million, or 21.1%, during the six months ended December 31, 2003 over the amounts reported during the
 six months ended December 31, 2002. The increase was comprised primarily of commission compensation
 earned by retail and broker account executives of $8.3 million during the six months ended December
 31, 2003 over the comparable six month period in 2002 due to the $881.0 million, or 38.7%, increase
 in total production during the 2003 period over total production during the 2002 period. In addition,
 the increase was due to $3.3 million of increased salaries resulting from increased staffing levels,
 predominantly in loan production personnel, during the six months ended December 31, 2003 over the same
 period in 2002 due primarily to the impact on head count caused by growth in the Companys retail branch
 network and, to a lesser extent, to other employee head count growth. Incentive compensation related
 to senior and other management increased $0.6 million during the six months ended December 31, 2003
 over the six months ended December 31, 2003. Finally, the increase in personnel expense during
 the six months ended December 31, 2003 over the amount reported during the comparable six month period
 a year ago is attributable to $1.8 million of increased health, medical, other benefit costs and incentive
 compensation awards to other employees.

Production. Production expense, primarily
 advertising, outside appraisal costs, travel and entertainment, and credit reporting fees increased
 $2.6 million to $8.3 million during the three months ended December 31, 2003 from $5.7 million during
 the three months ended December 31, 2002. Production expense during the six months ended December
 31, 2003 increased $4.0 million to $15.8 million over $11.8 million during the comparable six month
 period a year ago. The increase in production expense during the three and six months ended December
 31, 2003 from the comparable three and six month periods a year ago is due primarily to increased advertising,
 appraisal and credit reporting expenses relative to the Companys $352.8 million, or 27.0%, and $881.0
 million, or 38.7%, increases in loan origination volumes over those during the comparable three and
 six month periods a year ago, respectively. Production expense expressed as a percentage of total loan
 origination volume increased to 0.5% for the three months ended December 31, 2003 compared to 0.4%
 during the three months ended December 31, 2002. The increase is attributable to the increase in production
 expense during the three months ended December 31, 2003 over those reported during the comparable three
 month period a year ago, partially offset by the $352.8 million, or 27.0%, increase in total loan production
 during the three months ended December 31, 2003 over the levels reported during the same period a year
 ago. Production expense expressed as a percentage of total loan origination volume during the six months
 ended December 31, 2003 remained constant at 0.5% during the comparable six month period in 2002.

General and Administrative. General and
 administrative expenses increased $1.4 million to $12.3 million and $3.4 million to $25.0 million during
 the three and six months ended December 31, 2003, respectively, from $10.9 million and $21.6 million
 during the three and six months ended December 31, 2002, respectively. The increases during the three
 and six months ended December 31, 2003 from the comparable three and six month periods a year ago
 were primarily attributable to increases in professional, occupancy and communication expenses, partially
 offset by a decline in legal expenses. General and administrative expenses also includes the amortization
 of capitalized financing costs for revolving committed warehouse facilities entered into by the Company.
 Amortization expense related to such facilities was $1.0 million and $2.0 million during the three and
 six months ended December 31, 2003, respectively, compared to $0.9 million and $1.8 million during
 the three and six months ended December 31, 2002, respectively.

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Interest Expense. Interest expense decreased
 $2.9 million and $7.1 million to $5.2 million and $9.8 million during the three and six months ended
 December 31, 2003, from $8.1 million and $16.9 million during the three and six months ended December
 31, 2002, respectively. The decrease in interest expense during the three and six months ended December
 31, 2003 from levels reported during the comparable three and six month periods a year ago resulted
 primarily from lower interest rates associated with the Companys revolving warehouse and repurchase
 facilities used to fund the origination of mortgage loans prior to their disposition despite increased
 average borrowings in the 2003 periods. To a lesser extent, the decrease in interest expense resulted
 from the full redemption of the Companys Senior Notes and a $49.6 million decrease in the 5.5% Convertible
 Subordinated Debentures due 2006 (Existing Debentures) by the Company during the year ended June 30,
 2003. The Companys revolving warehouse and repurchase agreements bear interest rates that are indexed
 to the one-month LIBOR which, during the three and six months ended December 31, 2003, declined from
 levels during the three and six months ended December 31, 2002. While the Companys interest costs
 on its revolving warehouse and repurchase facilities trended down during the three and six months ended
 December 31, 2003 from the comparable periods a year ago, such interest expense is expected to increase
 in future periods due to the Companys continued reliance on external financing arrangements to fund
 mortgage loan production and expected continued upward pressure on one month LIBOR in coming quarters.

As
 a result of extinguishing the remaining $127.9 million of Senior Notes, which had a fixed 9.125% coupon
 rate, with the $74.1 million Financing Facility which bears interest at one-month LIBOR plus 2.75%,
 together with the reduction of the Financing Facility to $22.8 million at December 31, 2003, the redemption
 of the remaining $4.8 million of New Debentures and the $49.6 million decrease in the Existing Debentures,
 which have a fixed 5.5% coupon rate, during the year ended June 30, 2003, the Company expects that interest
 expense on its nonrevolving indebtedness will be lower in fiscal 2004 compared to fiscal 2003.

Income Taxes. During the three months
 ended December 31, 2003, the Company recorded an income tax provision of $0.2 million comprised of a
 $1.7 million federal benefit related to net operating loss carryforwards and a $1.9 million provision
 which related to various state tax obligations. During the six months ended December 31, 2003, the Company
 recorded an income tax benefit of $18.0 million. The Company has determined it is more likely than not
 that certain future tax benefits, primarily net operating loss carryforwards, will be realized as a
 result of future income. Therefore, during the three and six months ended December 31, 2003, the deferred
 tax valuation allowance was decreased to recognize higher than previously anticipated net deferred tax
 assets. During the three and six months ended December 31, 2003, the Companys effective tax rates were
 1.2% and (64.5%), respectively. The variance in the effective rate from the federal statutory rate is
 due the to the recognition of deferred tax assets resulting from net operating loss carryforwards. During
 the three and six months ended December 31, 2002, the Company recorded income tax provisions of $1.6
 million and $2.2 million, respectively, which related primarily to taxes on excess inclusion income
 on the Companys REMIC trusts and, to a lesser extent, to miscellaneous state tax obligations. Such
 tax provisions reflect effective tax rates of 43.0% and 15.4% for the three and six months ended December
 31, 2002.

The
 investment in the Company by Capital Z during the year ended June 30, 1999 resulted in a change
 in control for income tax purposes thereby potentially limiting future net operating loss and certain
 other future deductions for losses prior to February 1999.

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Financial Condition

Loans Held for Sale. The Companys portfolio
 of loans held for sale increased to $690.9 million at December 31, 2003 from $401.0 million
 at June 30, 2003 due primarily to total loan originations exceeding total loan dispositions during
 the six months ended December 31, 2003.

Advances and Other Receivables. Advances
 and other receivables are comprised of interest and servicing advances; servicing and miscellaneous
 fees; cash due from the securitization trusts; and accrued interest receivable and other miscellaneous
 receivables. The level of servicing advances, in any given period, is dependent upon portfolio delinquencies,
 the level of REO and loans in the process of foreclosure, and the timing and remittance of cash collections
 on mortgage loans in the securitization trusts. The Company funds advances on a recurring basis not
 otherwise covered by financing arrangements and recovers those advances on a periodic basis.

Advances
 and other receivables decreased $20.1 million to $21.2 million at December 31, 2003 from $41.3 million
 at June 30, 2003. The decrease is primarily attributable to decreases of $22.4 million and $0.3
 million in interest and servicing advances and servicing and miscellaneous fees receivable, respectively,
 partially offset by increases of $2.6 million in accrued interest and other receivables.

The
 $22.4 million decrease in servicing and interest advances to the securitization trusts at December 31,
 2003 from June 30, 2003 is comprised of $8.6 million of advances made by the Company in its role
 of servicer of the mortgage loans in the securitization trusts, net of $16.0 million of recoveries of
 such advances during the three months ended December 31, 2003. In addition, the decrease is also
 attributable to servicing and advance recoveries of $15.0 million received during the six months ended
 December 31, 2003 from the Companys pool calls. The $0.3 million decline in servicing and miscellaneous
 fees receivable at December 31, 2003 from June 30, 2003 is due primarily to declining servicing
 and late fees earned by the Company as a consequence of the decrease in its portfolio of mortgage loans
 in securitization trusts during the six months ended December 31, 2003. The $2.6 million increase
 in accrued interest receivable and other receivables at December 31, 2003 when compared to the balance
 at June 30, 2003 is due primarily to a $2.2 million increase in amounts due from counterparties
 on whole loan sales and other transactions, coupled with a $0.4 million increase in accrued interest
 receivable at December 31, 2003. The Company periodically evaluates its accounts receivable for
 realizability and charges income for amounts deemed uncollectible.

Residual Interests. Residual interests
 decreased to $52.0 million at December 31, 2003 from $129.2 million at June 30, 2003,
 reflecting $80.6 million of cash received from the securitization trusts, partially offset by $3.4 million
 of accretion during the six months ended December 31, 2003.

Equipment and Improvements, net. Equipment
 and improvements, net, increased to $9.1 million at December 31, 2003 from $8.9 million at
 June 30, 2003 reflecting the capitalization of new equipment and improvement acquisitions outpacing
 depreciation and amortization during the six months ended December 31, 2003.

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Prepaid and Other Assets. Prepaid and
 other assets decreased to $15.3 million at December 31, 2003 from $17.7 million at June 30,
 2003. The decrease was attributable primarily to the receipt by the Company of $2.5 million of licensing,
 permit and performance bond deposits during the six months ended December 31, 2003. Included in prepaids
 and other assets at June 30, 2003 were $0.2 million of MSRs which were fully amortized at December
 31, 2003. During the six months ended December 31, 2003, the Company did not capitalize any MSRs as
 all of the Companys $2.9 billion of total loan dispositions were whole loan sales for cash with servicing
 released.

Borrowings. As previously reported, on
 June 30, 2003, the Company redeemed $127.9 million principal balance of its Senior Notes representing
 all remaining outstanding Senior Notes, at par plus accrued and unpaid interest. The Company funded
 the redemption of the Senior Notes by borrowing $74.1 million through the Financing Facility and paying
 the remaining $53.8 million in cash. Borrowings, which totaled $87.2 million at December 31, 2003, was
 comprised of $64.4 million outstanding under the Companys Existing Debentures and $22.8 million outstanding
 under the Financing Facility. In comparison, amounts outstanding under the Existing Debentures and the
 Financing Facility were $64.4 million and $74.1 million, respectively, or a total of $138.5 million,
 at June 30, 2003. The $51.3 million decline in borrowings at December 31, 2003 from June 30, 2003, represents
 the Companys payments on the Financing Facility during the six months ended December 31, 2003.

Revolving Warehouse Facilities. Amounts
 outstanding under revolving warehouse and repurchase facilities increased to $603.1 million at December
 31, 2003 from $343.7 million at June 30, 2003 as the result of the increase in loans held
 for sale due to loan originations during the six months ended December 31, 2003, partially offset by
 the Companys loan dispositions during the period. Proceeds from whole loan sales and securitizations
 are used first to reduce balances outstanding under the Companys revolving warehouse and repurchase
 facilities, and then used to satisfy corporate operating requirements.

Liquidity and Capital Resources

The
 Companys operations require continued access to short-term and long-term sources of cash. The Companys
 primary operating cash requirements include: (i) the funding of mortgage loan originations and purchases
 prior to their securitization and sale, (ii) fees, expenses and hedging costs, if any, incurred in connection
 with the securitization and sale of loans, (iii) ongoing administrative, operating, and tax expenses,
 (iv) interest and principal payments and liquidity requirements under the Companys revolving warehouse
 and repurchase facilities, and other existing indebtedness, (v) advances in connection with the Companys
 servicing portfolio, and (vi) overcollateralization requirements in connection with securitizations.

The
 Companys primary sources of liquidity are expected to be (i) fundings under revolving warehouse and
 repurchase facilities, (ii) securitization and sale of mortgage loans and related servicing rights and
 (iii) monetization of the overcollateralization in the Companys portfolio of mortgage loans in securitization
 trusts. As previously reported, at June 30, 2003, the Company monetized its residual interests and its
 servicing advances through the Financing Facility.

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Warehouse
  and Repurchase Facilities. The Company generally relies on revolving warehouse
  and repurchase facilities to finance the origination or purchase of mortgage
  loans prior to securitization or sale. At December 31, 2003, the Company had
  total revolving warehouse and repurchase facilities in the amount of $1.2 billion,
  of which $1.1 billion and $100.0 million were committed and uncommitted, respectively.
  At December 31, 2003, amounts outstanding under the facilities were $603.1 million.
  Of the $1.2 billion of revolving warehouse and repurchase facilities available
  to the Company at December 31, 2003, $300.0 million, $200.0 million, $200.0
  million, $300.0 million and $200.0 million mature on July 30, 2004, August 27,
  2004, September 30, 2004, October 30, 2004 and November 30, 2004, respectively.

Certain
 of the Companys warehouse and repurchase facility lenders advance less than 100% of the principal balance
 of the mortgage loans, requiring the Company to use working capital to fund the remaining portion of
 the principal balance of the mortgage loans.

All
 of the Companys revolving warehouse and repurchase facilities contain provisions requiring the Company
 to meet certain periodic financial covenants, including, among other things, minimum liquidity, stockholders
 equity, leverage, and net income levels. If the Company is unable to meet these financial covenants
 going forward, or is unable to obtain subsequent amendments or waivers, if required, or for any other
 reason is unable to maintain existing warehouse or repurchase lines or renew them when they expire,
 it would have to cease loan production operations which would jeopardize the Companys ability to continue
 to operate as a going concern.

The Securitization and Sale of Mortgage Loans.
 The Companys ability to sell loans originated by it in the secondary market through securitizations
 and whole loan sales is necessary to generate cash proceeds to pay down its warehouse and repurchase
 facilities and fund new mortgage loan originations. The ability of the Company to sell loans in the
 secondary market on acceptable terms is essential for the continuation of the Companys loan origination
 operations.

During
 the six months ended December 31, 2003, the Company did not dispose of any of its loans through securitizations
 and sold all of its $2.9 billion of loan dispositions in whole loan sales for cash. Of the Companys
 $2.1 billion of loan dispositions during the six months ended December 31, 2002, $1.8 billion and $315.0
 million were sold in whole loan sales for cash and securitized, respectively. The gain on sale recognized
 by the Company on securitizations and whole loan sales is affected by, among other things, market conditions
 at the time of the loan disposition, and the Companys assumptions used in securitizations. See Results
 of OperationsRevenue.

In
 connection with securitization transactions, the Company is generally required to provide credit enhancements
 in the form of overcollateralization amounts or reserve accounts. In addition, during the life of the
 related securitization trusts, the Company subordinates a portion of the excess cash flow otherwise
 due it to the rights of holders of senior interests as a credit enhancement to support the sale of the
 senior interests. The terms of the securitization trusts generally require that all excess cash flow
 otherwise payable to the Company during the early months of the trusts be used to increase the cash
 reserve accounts or to repay the senior interests in order to increase overcollateralization to specified
 maximums. Overcollateralization requirements for certain pools increase up to approximately twice the
 level otherwise required when the delinquency rates or realized losses for those pools exceed the specified
 limit. At December 31, 2003, an additional $26.4 million of overcollateralization was required to be
 maintained due to the level of delinquency rates and realized losses of mortgage loans being in excess
 of specified delinquency rates and realized losses in certain securitization trusts. At December 31,
 2003, the Company was required to maintain overcollateralization amounts of $63.7 million, which included
 the $26.4 million, of which $63.7 million was maintained.

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In
 the Companys securitizations structured as a real estate mortgage investment conduit (REMIC), the
 recognition of non-cash gain on sale has a negative impact on the cash flow of the Company since the
 Company is required to pay federal and state taxes on a portion of these amounts in the period recognized
 although it does not receive the cash representing the gain until later periods as the cash flows are
 received and applicable reserve or overcollateralization requirements are met.

Monetization
  of Overcollateralization in the Companys Portfolio of Mortgage Loan in
  Securitization Trusts. The Company had retained residual interests in seven
  securitization trusts which had overcollateralization balances of $63.7 million
  at December 31, 2003. Of the seven securitization trusts, four are currently
  callable and three are not callable until later in calendar 2004. If the Company
  calls any additional securitization trusts, the Company receives a majority
  of the overcollateralization balance from the called trusts in a combination
  of mortgage loans in the trust and cash.

Other
 sources of cash previously used by the Company to fund its operations included the monetization of residual
 interests and servicing advances and debt and equity securities.

Monetization of Residual Interests. As
 previously reported, on June 30, 2003 the Company borrowed $74.1 million ($22.8 million at December
 31, 2003) through the Financing Facility of which $49.2 million ($13.1 million at December 31, 2003)
 was secured by its residual interests.

Monetization of Servicing Advances. The
 Company pledged certain of its existing servicing advances to collateralize $24.9 million ($9.7 million
 at December 31, 2003) of the Financing Facility. Future servicing advances related to certain of the
 Companys securitization trusts will also collateralize the Financing Facility unless and until it is
 fully repaid.

The Issuance of Debt and Equity Securities.
 Since February 1999, the Company has raised $180.2 million through the sale of preferred stock
 in several phases, consisting of $170.8 million to Capital Z and its designees, $4.7 million
 to certain members of the Companys management and $4.7 million to holders of the Companys common
 stock. The Company also issued warrants to affiliates and employees of an affiliate of Capital Z to
 purchase an aggregate of 500,000 shares of the Companys common stock for $5.00 per share in February
 1999, and warrants to purchase 5.0 million shares of Series D Convertible Preferred Stock
 at $0.85 per share in July 2001.

On
 June 30, 2003, the Company redeemed its Senior Notes through a $53.8 million cash remittance and by
 borrowing $74.1 million pursuant to the Financing Facility due December 31, 2004. Under the Financing
 Facility, the Company is required to comply with various operating and financial covenants including
 covenants which may restrict the Companys ability to pay certain distributions, including dividends.
 The Company received a waiver from the lender permitting the Company to pay dividends, as declared,
 on its preferred stock accrued through December 31, 2003.

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The
 Company had cash and cash equivalents of approximately $11.6 million at December 31, 2003.

If
 the Companys access to warehouse lines, working capital or the securitization or whole loan markets
 is restricted, the Company may have to seek additional equity. There can be no assurance that sufficient
 sources of liquidity will be available to the Company at any given time or that favorable terms will
 be available. If the Company is unable to maintain sufficient liquidity, the Company would be restricted
 in the amount of loans that it will be able to produce and sell which would negatively impact profitability
 and jeopardize the Companys ability to continue to operate as a going concern.

Risk Management

At
 and during the three months ended December 31, 2003, the Company had no hedge instruments in place.
 During the three months ended December 31, 2002, as it has from time to time, entered into agreements
 to hedge its interest rate risk exposure to its loans held for sale. At December 31, 2002, the
 Company had notional amounts of $225.0 million of forward interest rate swap agreements in place to
 hedge exposure to its inventory and pipeline of loans held for sale. Gain on sale of loans during the
 three months ended December 31, 2002 includes a charge of $2.8 million related to the Companys hedging
 activities, of which $1.8 million related to losses on closed forward interest rate swap agreements
 and $1.0 million related to the Companys mark to the estimated fair value of forward interest rate
 swap agreements open at December 31, 2002. Gain on sale of loans during the six months ended December
 31, 2002 included charges of $10.7 million related to the Companys hedging activities. Of the $10.7
 million charge during the six months ended December 31, 2002, $8.9 million related to losses on closed
 forward interest rate swap agreements and $1.8 million related to the Companys market to the estimated
 fair value of forward interest rate swap agreements open at December 31, 2002. The Company continually
 monitors the interest rate environment and its hedging strategies. However, there can be no assurance
 that the earnings of the Company would not be adversely affected during any period of unexpected changes
 in interest rates or prepayment rates, including charges to earnings on future derivative contracts
 into which the Company may enter.

Rate Sensitive Derivative Financial Instruments,
 Rate Sensitive Assets and Liabilities and Off-Balance SheetActivities

Sale of LoansSecuritizations and Whole Loan
 SalesInterest Rate Risk. A significant variable in the determination of gain on sale in a securitization
 is the spread between the weighted average coupon on the securitized loans and the pass-through interest
 rate. In the interim period between loan origination or purchase and securitization of such loans, the
 Company is exposed to interest rate risk. The majority of loans are either sold or securitized within
 90 days of origination or purchase. However, a portion of the loans is held for sale or securitization
 for as long as 12 months (or longer, in very limited circumstances) prior to securitization or
 sale. If interest rates rise during the period that the mortgage loans are held, the spread between
 the weighted average interest rate on the loans to be securitized and the pass-through interest rates
 on the securities to be sold (the latter having increased as a result of market rate movements) would
 narrow. Upon sale or securitization, this would result in a reduction of the Companys related gain
 on sale. From time to time, the Company mitigates exposure to rising interest rates through the use
 of forward interest rate swap agreements or other hedging activities. These hedging activities help
 mitigate the risk of absolute movements in interest rates.

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Rate sensitive assets and liabilities.
 At December 31, 2003, the Companys $690.9 million inventory of loans held for sale was comprised
 of $161.1 million and $529.8 million of fixed and variable rate mortgage loans, respectively,
 which had weighted average interest rates of 8.18% and 7.32%, respectively. The weighted average interest
 rate on the Companys total inventory of loans held for sale was 7.75% at December 31, 2003. In comparison,
 at June 30, 2003 the Companys $401.0 million inventory of loans held for sale was comprised
 of $165.8 million and $235.2 million of fixed and variable rate mortgage loans, respectively,
 which had weighted average interest rates of 7.79% and 7.65%, respectively. The weighted average interest
 rate on the Companys total inventory of loans held for sale was 7.72% at June 30, 2003.

At
 December 31, 2003, the Company had aggregate outstanding funded indebtedness of $690.3 million,
 of which $625.9 million and $64.4 million bore variable and fixed interest rates, respectively.
 At December 31, 2003, the weighted average variable interest rate on the Companys $625.9 million
 of outstanding revolving warehouse and repurchase facilities and the Financing Facility was 2.27%. All
 of the Companys revolving warehouse and repurchase facilities and the Financing Facility were indexed
 to one-month LIBOR which, at December 31, 2003, was 1.12%. The weighted average interest rate on the
 Companys $64.4 million of outstanding fixed rate borrowings was 5.5% at December 31, 2003 and
 at June 30, 2003. At June 30, 2003 the weighted average interest rate on the Companys $417.8 million
 of outstanding revolving warehouse and repurchase facilities and the Financing Facility was 2.52%. At
 June 30, 2003, the one-month LIBOR was 1.12%.

Residual Interests and MSRs. The Company
 had residual interests of $52.0 million and $129.2 million outstanding at December 31, 2003
 and June 30, 2003, respectively. The Company had no MSRs outstanding at December 31, 2003 and $0.2
 million at June 30, 2003. Residual interests were recorded at estimated fair value. The Company values
 these assets based on the present value of estimated future cash flows using various assumptions. The
 discount rates used to calculate the present value of the residual interests were 13.7% and 13.5% at
 December 31, 2003 and June 30, 2003, respectively. The weighted average life of the mortgage loans
 used for valuation was 1.8 years at December 31, 2003 and 1.9 years at June 30, 2003.

The
 residual interests are subject to actual prepayment or credit loss risk in excess of assumptions used
 in valuation. Ultimate cash flows realized from these assets would be reduced should actual prepayments
 or credit losses exceed assumptions used in the valuation. Conversely, cash flows realized would be
 greater should actual prepayments or credit losses be below expectations.

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Fair Value of Financial Instruments.The
 Company uses various methods and assumptions when estimating the fair value of financial instruments.
 Cash and cash equivalents are based on the carrying amount which is a reasonable estimate of the fair
 value. Loans held for sale are based on current investor yield requirements. Advances and other receivables
 are generally short term in nature, therefore the carrying value approximates fair value. Residual interests
 and mortgage servicing rights are based on the present value of expected future cash flows using assumptions
 based on the Companys historical experience, industry information and estimated rates of future prepayment
 and credit loss. Borrowings are based on the carrying amount when such amount is a reasonable estimate
 of fair value or on quoted market prices. Amounts outstanding under revolving warehouse and repurchase
 facilities are short term in nature and generally bear market rates of interest and, therefore, are
 based on the carrying amount which is a reasonable estimate of fair value. Forward interest rate swap
 agreements are based on quoted market prices.

Credit Risk. The Company is exposed to
 on-balance sheet credit risk related to its loans held for sale and residual interests. The Company
 is exposed to off-balance sheet credit risk related to loans which the Company has committed to originate
 or purchase.

Warehousing Exposure. The Company utilizes
 revolving warehouse and repurchase facilities to facilitate the holding of mortgage loans prior to securitization
 or sale in the whole loan markets. At December 31, 2003, the Company had total revolving warehouse
 and repurchase facilities available in the amount of $1.2 billion, of which $1.1 billion and $100.0
 million was committed and uncommitted, respectively, and the total amount outstanding on these facilities
 was $603.1 million. Revolving warehouse and repurchase facilities are typically for a term of one year
 or less and are designated to fund mortgages originated within specified underwriting guidelines. The
 majority of the assets remain in the facilities for a period of up to 90 days at which point they
 are securitized and/or sold to institutional investors. As these amounts are short term in nature and/or
 generally bear market rates of interest, the contractual amounts of these instruments are reasonable
 estimates of their fair values.

Item 4. Controls and Procedures.
 At the end of the period covered by this report on Form 10-Q, the Company carried out an evaluation,
 under the supervision and with the participation of the Companys Disclosure Committee and management,
 including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design
 and operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rule 15d-15.
 Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the
 Companys disclosure controls and procedures are effective in timely alerting them to material information
 relating to the Company (including its consolidated subsidiaries) required to be included in reports
 the Company files with the SEC pursuant to the Securities Exchange Act of 1934. Subsequent to the date
 of that evaluation, there have been no significant changes in the Companys internal controls or in
 other factors that could significantly affect the internal controls.







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PART IIOTHER INFORMATION

Item 1. Legal Proceedings

The
 Company becomes involved, from time to time, in a variety of mortgage lending related claims and other
 matters incidental to its business. In the opinion of the Company, the resolution of any of these pending
 incidental matters is not expected to have a material adverse effect on its consolidated financial position
 and results of operations.

Item 2. Changes in
 Securities and Use of ProceedsNone

Item 3. Defaults
 upon Senior SecuritiesNone

Item 4. Submission of
 Matters to a Vote of Security Holders 

|(a) |  | The Company held its Annual Meeting of Stockholders (the Meeting) on November 20, 2003.
|--- |  | -----------------------------------------------------------------------------------------

|(b) |  | The following four Series B Directors were elected at the Meeting to serve a one year term:
|--- |  | -------------------------------------------------------------------------------------------

| |  | Daniel C. LieberMani A. SadeghiRobert
 A. SpassJoseph R. Tomei
| |  | --------------------------------------------------------------

| |  | The following Class I Common Stock Directors
 were elected at the Meeting to serve a three-year term:
| |  | -----------------------------------------------------------------------------------------------------

| |  | David H. ElliottA. Jay Meyerson
| |  | -------------------------------

| |  | The following Directors continued in office after
 the Meeting:
| |  | ---------------------------------------------------------------

| |  | Dr. Jenne K. BritellEric C. RaheStephen
 E. Wall
| |  | ------------------------------------------------

|(c) |  | At the Meeting, stockholders voted on (1) the election of four Series B directors, (2) the election of two Class I Common Stock Directors and (3) the ratification of the appointment of Ernst & Young LLP as the Companys independent accountants for the fiscal year ended June 30, 2004. The results of the voting were as follows:
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|                                 | Votes
|-------------------------------- | -----
|
|Matter                           |      
|                                 |      
|Election of Series B Directors:  |      
|Daniel C. Lieber                 |      
|Mani A. Sadeghi                  |      
|Robert A. Spass                  |      
|Joseph R. Tomei                  |      
|                                 |      
|Election of Class I Common Stock |      
|Directors:                       |      
|                                 |      
|David H. Elliott                 |      
|A. Jay Meyerson                  |      
|Ratification of                  |      
|Independent Accountants          |      

Item 5. Other InformationNone

Item 6. Exhibits
 and Reports on Form 8-K

|(a) |  | Exhibits: See Exhibit Index
|--- |  | ---------------------------

|(b) |  | The Company filed the following Current Reports on Form 8-K during the quarter ended December 31, 2003:
|--- |  | -------------------------------------------------------------------------------------------------------

| |  | On October 9, 2003, the Company filed a Form 8-K (dated October 9, 2003) reporting presentation materials for the ABS East 2003 conference.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------

| |  | On October 17, 2003, the Company filed a Form 8-K (dated July 31, 2003) reporting delinquency and loss statistics in the loan servicing portfolio of Aames Capital Corporation, a wholly owned subsidiary of the Company.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On October 17, 2003, the Company filed a Form 8-K (dated August 31, 2003) reporting delinquency.
| |  | ------------------------------------------------------------------------------------------------

| |  | On November 20, 2003, the Company filed a Form 8-K (dated November 20, 2003) disclosing the presentation materials for the Companys 2002 Annual Stockholder Meeting.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | On November 21, 2003, the Company filed a Form 8-K (dated November 20, 2003) reporting results for the quarter ended and loss statistics in the loan servicing portfolio of Aames Capital Corporation.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | September 30, 2003 and the declaration of a cash dividend to holders of preferred stock.
| |  | ----------------------------------------------------------------------------------------

| |  | On December 5, 2003, the Company filed a Form 8-K (dated September 30, 2003) reporting delinquency and loss statistics in the loan servicing portfolio of Aames Capital Corporation.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On December 5, 2003, the Company filed a Form 8-K (dated October 31, 2003) reporting delinquency and loss statistics in the loan servicing portfolio of Aames Capital Corporation.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On December 15, 2003, the Company filed a Form 8-K (dated December 12, 2003) reporting the per share dividend amount for cash dividend.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------

















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# AAMES FINANCIAL CORPORATION

# SIGNATURES

Pursuant
 to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused
 this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

|                        |     | AAMES FINANCIAL CORPORATION                                                      
|----------------------- | --- | ---------------------------------------------------------------------------------
|Date: February 13, 2004 |     |                                                                                  
|                        | By: | /s/Ronald J. Nicolas, Jr.                                                        
|                        |     |                                                                                  
|                        |     | Ronald J. Nicolas, Jr.Executive Vice PresidentFinance andChief Financial Officer
|                        |     |                                                                                  













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# EXHIBIT INDEX

|   |       
|-- | ------
|3  | .1    
|3  | .2    
|4  | .1    
|4  | .2    
|4  | .3    
|4  | .4    
|4  | .5    
|4  | .6    
|4  | .7    
|4  | .8    
|4  | .10   
|10 | .32(e)
|10 | .35(d)
|10 | .35(e)
|10 | .36(d)
|10 | .36(e)
|11 |       
|31 | .1    
|31 | .2    
|32 |       

____________________________

|(1) |  | Incorporated by reference from the Registrants registration statement on Form S-8, file number 333-108915, filed September 18, 2003
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Incorporated by reference from Registrants Annual Report on Form 10-K for the year ended June 30, 1999, filed with the Commission on September 3, 1999
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated by reference from the Registrants Form 10-K for the year ended June 30, 2000, filed with the Commission on September 28, 2000
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Incorporated by reference from Registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and filed with the Commission on July 3, 1996
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------